FINE ELITE GROUP LTD v. CHENG WAI TAO

HCA 1269/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1269 OF 2008

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J U D G M E N T

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Background

1.  Jason Poon (“Jason”), Daisy Poon (“Daisy”) and the defendant Cheng Wai To (“Ricky”) were business partners engaged in the operation as franchisees in Hong Kong of a successful chain of Japanese style noodle restaurants under the trade name “AJISEN RAMEN” and “味千拉麵”.  Ricky was a self-made man who started his career as an apprentice working in a restaurant in Japan.  His interests in Japanese cuisine and Japanese culture led to his establishing contacts in Japan, one of which was Mr Shigemitsu (“Shigemitsu”) who in turn brought Ricky and Daisy together to operate the Ajisen franchise in Hong Kong.  Daisy was at that time in the food export business.  The business of the Ajisen ramen restaurants in Hong Kong (“Ajisen Business”) was operated through a group of companies (“Ajisen Group”), of which Daisy, Jason, Ricky and Shigemitsu were shareholders.  In 1996, the first Ajisen ramen restaurant was opened in Hong Kong.  The Ajisen Business continued to grow thereafter, with each Ajisen restaurant being held by a separate company within the Ajisen Group.  The Ajisen Business became so successful that it was eventually listed in Hong Kong in 2007.

2.  Daisy and her brother Jason claim that in around late 2003, the shareholders of the Ajisen Group decided to expand their business beyond Japanese style noodle shops, and began to look for suitable premises to operate a Japanese style bar/restaurant.  The idea of a Japanese style bar/restaurant was later abandoned, and it is claimed that in around 2004, the shareholders of the Ajisen Group orally agreed (“2004 Agreement”) to develop a chain of Japanese style sushi restaurants, using corporate vehicles in which the shareholders of Ajisen Group would take up shares, which sushi restaurants were to be an extension of the Ajisen Business, and would be managed and operated by Ricky.

3.  According to Daisy and Jason, Smart Wave Limited (“Smart Wave”) was incorporated in pursuance of the 2004 Agreement, as the corporate vehicle to manage and operate the first Japanese style sushi restaurant under the name “ITAMAE SUSHI” “板前壽司” at Granville Road, in Tsimshatsui. Ricky is and was at all material times the sole director of Smart Wave and the registered holder of 38% of its shares.  Daisy and Jason were at all material times the registered holder of 24% and 10% respectively of the shares of Smart Wave.  Shigemitsu and others were also allotted shares in Smart Wave.

4.  It is claimed that Ricky had acted in breach of the 2004 Agreement in setting up companies to operate sushi restaurants, but failed to allot shares in these companies to Daisy, Jason or the other shareholders of the Ajisen Group.  Between December 2004 and September 2006, 6 Itamae restaurants were established and operated by 6 different companies (“Itamae Companies”), of which Ricky was the sole beneficial owner.  These Itamae sushi restaurants apparently became an instant success, and inevitably, success breeds dispute.  Daisy and Jason claim that despite their demands, Ricky failed to allot to them any shares in the companies under which the Itamae restaurants were operated.

5.  On his part, Ricky denies that the Itamae restaurants were an extension of the Ajisen ramen restaurants.  He claims that he had planned the operation of the Itamae sushi restaurants as his own chain, and not as a mere franchisee of a Japanese corporation, to bear his own style and his personal stamp.  According to Ricky, the trademarks “ITAMAE”, “板前” and the associated logo were his own creation, and he had offered shares in Smart Wave to Daisy and Jason with the intention that Smart Wave was to operate the first Itamae restaurant only.  Ricky claims that it was all along his intention to remain the sole owner of the Itamae name and to retain the right to use the “ITAMAE” trade marks for other sushi restaurants in the chain to be owned and operated by him.  However, he admits in his testimony in court that he had not informed Ricky and Daisy of this in 2004.

6.  At around the same time as the successful opening of the second and third Itamae restaurants, plans were underway for the listing of the Ajisen Group.  In addition to the disputes as to Daisy’s and Jason’s entitlement to shares in the companies holding the Itamae restaurants operated by Ricky, there were also disputes about the ownership of the chain of Ajisen restaurants which had been opened in Mainland China.  Ricky had also complained about not receiving his entitlement to dividends from the Ajisen Group. 

The compromise

7.  In September 2006, the disputes between Ricky, Jason and Daisy in relation to their respective shareholding in the Itamae restaurants and the Ajisen restaurants were resolved, as part of the preparatory steps taken for the listing of the Ajisen Group.  The compromise involved the execution by Ricky on the first part, and Daisy and Jason acting through their corporate vehicle Fine Elite Group Ltd (“Fine Elite”, the plaintiff in these proceedings) on the other part, of a shareholders’ agreement dated 16 September 2006 (“Hero Elegant Agreement”).  The Hero Elegant Agreement governed the rights of Ricky, Daisy and Jason as shareholders of Hero Elegant Ltd (“Hero”). By then, at least 2 other Itamae restaurants had been established, each held by a company of which Ricky was the sole shareholder and director.  Hero and its subsidiaries were intended under the Hero Elegant Agreement to manage and operate the sushi restaurants using the “Itamae” “板前” trade marks.  Under the Hero Elegant Agreement, Ricky was to have 69% of the shares of Hero, whereas Fine Elite was to hold (on behalf of Daisy and Jason) 31% of the shares of Hero.

8.  At the same time, Ricky and Daisy entered into a separate shareholders’ agreement (“Favor Will Agreement”), to govern their rights as holders of 11% and 82% respectively of the shares in Favor Will Ltd (“Favor”).  The Favor Will Agreement mirrored the Hero Elegant Agreement.  Favor and its subsidiaries were to manage and operate the ramen restaurants using the “Ajisen” trade marks.

9.  Effectively, whatever the merits of the respective claims made by Jason and Daisy on the one part, and Ricky on the other part, to the Itamae Companies and the ITAMAE trade marks, the Hero Elegant Agreement was entered into to provide for their respective rights to, and for the future operation and management of the Itamae restaurants and, under the Favor Will Agreement, the Ajisen Business.  Whatever rights Jason and Daisy might have had in the Itamae Companies and the Itamae restaurants by virtue of their contribution to the setting up costs of the Itamae restaurants, they agreed (through Fine Elite) to accept 31% of the shareholding in Hero (which was to hold the interests in all the Itamae restaurants) instead of their 34% in Smart Wave (which held the first Itamae restaurant), or any other percentage Daisy had argued for in early 2006.

The dispute

10.  Daisy and Jason claim that in breach of the Hero Elegant Agreement, Ricky continued to manage and operate the Itamae restaurants using Itamae Companies which were solely owned by him, and failed to transfer the shares in the Itamae Companies to a holding company in which Fine Elite would be allotted with 31% of its issued shares, as provided for in the Hero Elegant Agreement.  By HCA 1269/2008, Fine Elite seeks specific performance of the Hero Elegant Agreement and alternatively, an account of the profits made by Ricky in breach of the Hero Elegant Agreement.  Separately, by HCA 304/2011, Jason (suing on behalf of himself and other shareholders of Smart Wave) claims that Ricky had acted in breach of his fiduciary duties as director of Smart Wave, in failing to allot or transfer shares in the Itamae Companies to Smart Wave; in failing to account for the profits made to Smart Wave; and in operating the Itamae restaurants using the “Itamae” marks.  It is also claimed by Jason, on behalf of Smart Wave, that Ricky had acted in breach of his fiduciary duties in operating Japanese style sushi restaurants under the trade names and marks “ITACHO SUSHI” and “板長壽司”, which are confusingly similar to the “ITAMAE SUSHI” “板前壽司” marks.

11.  In defence, Ricky claims that the Hero Elegant Agreement had been repudiated by Fine Elite, and that such repudiation had been accepted by him, such that he was discharged from further performance under the Hero Elegant Agreement.  He further maintains that he is the owner of, and at all material times retained the right to use, the “ITAMAE SUSHI” “板前壽司” name and mark, and that Smart Wave never had the exclusive right to use the same.

The issues

12.  The following issues arise for determination from the pleadings, evidence and arguments made at trial:

(1)   whether Ricky is entitled to registration of the “ITAMAE SUSHI” “板前壽司” marks and the associated logo (collectively “Service Marks”);

(2)   whether Fine Elite was in repudiatory breach of the Hero Elegant Agreement;

(3)   whether Ricky had accepted Fine Elite’s repudiatory breach;

(4)   whether Fine Elite is entitled to an order for specific performance of the Hero Elegant Agreement, or to damages;

(5)   whether Ricky was in breach of fiduciary duties as director of Smart Wave; and

(6)   the remedies to which Smart Wave may be entitled as against Ricky.

Whether Ricky is entitled to registration of the Service Marks

13.  Ricky and Jason have made competing claims to be the creator of the design of the Service Marks.  They have filed witness statements in these proceedings as well as affirmations in the trademark opposition proceedings.  In brief, prior to the execution of the Hero Elegant Agreement, Ricky had instructed his lawyers in May 2006 to apply for registration of the Service Marks in Mainland China before seeking registration in Hong Kong.  When Jason found out about this in August 2006, he applied for registration of the Service Marks in the name of Fine Elite in Hong Kong.  It was this application for registration of the Service Marks in Hong Kong (“Fine Elite Application”) which led Ricky to claim that the Hero Elegant Agreement had been repudiated.  Ricky initiated opposition proceedings in Hong Kong, claiming that the Service Marks were his and that Jason and Fine Elite had acted in bad faith in seeking registration of the Service Marks in Fine Elite’s name.

14.  I regard Jason’s evidence as to his alleged design and ownership of the Service Marks to be totally unconvincing and incredible.  His claim was that he had come up with the name “板前”, that he had been responsible for the decoration works of the first Itamae restaurant, and that his staff at Design Union Interior Contracting Ltd had created the design of the Service Marks for him.  In the original Reply filed in HCA 1269/2008 in November 2008, it was claimed that the Service Marks were designed by Jason and that he was entitled to apply for registration of the Service Marks in his name.  These pleas were abandoned when the Reply was amended in September 2009.  At trial, Jason could only maintain in his testimony in Court that he had participated in deciding on the colour of the design or the Chinese characters, in the course of producing the signage for the restaurant.  Nor could Jason give any clear answers when he was asked for details of which of his staff had designed the Service Marks, and how they had come up with the design.  It is clear from Jason’s evidence that he or his staff had obtained the design of the Service Marks from the computer file sent by Mr Akira (“Akira”), who was instructed by Ricky.   

15.  Ricky claims that he had made rough sketches of the design of a logo for the Itamae restaurant, and commissioned his friend Akira to produce the computer-generated design of the logo and the style of the Chinese characters for the name “板前” and of the Japanese styled English name “ITAMAE”.  Akira acknowledged in the affirmation he filed in the trademark opposition proceedings that the design of the logo he produced for Ricky was based on Ricky’s drawing of the design. 

16.  I do not consider that it is necessary in these proceedings to make a conclusive ruling on the ownership of the Service Marks.  In my judgment, Fine Elite (and Jason and Daisy through it) is not in a position to deny that Ricky had the right to apply for registration of the Service Marks in his name.  Whether or not Akira had rights in the design, which do not appear to have been asserted by him, Fine Elite expressly acknowledged and agreed in the Hero Elegant Agreement that Ricky was the person who was entitled to apply for registration of the Service Marks in his name.

17.  Under the Hero Elegant Agreement, the Service Marks are defined to be the marks “bearing the name of “ITAMAE SUSHI (板前壽司) used in the course of or associated with the Business and currently applied for registration in the name of Party A” (emphasis added).  Party A to the Hero Elegant Agreement is Ricky. “Business” is defined in clause 2.1 of the Hero Elegant Agreement to mean “the business of establishing, managing and operating Japanese style chain restaurants and related business using the Service Marks”.  Under clause 14.4 of the Hero Elegant Agreement, Ricky grants to Hero an exclusive licence to use the Service Marks worldwide during the continuance of the agreement. 

18.  Ricky’s pleaded case is that it was an express, and alternatively implied, term of the Hero Elegant Agreement that the Service Marks would be owned by and belong to Ricky, whose title and rights were recognized by Fine Elite, Jason, Daisy and Hero, but that Ricky would be obliged under the Hero Elegant Agreement to grant an exclusive licence to Hero.  Ricky claims that Fine Elite, Jason and Daisy are not entitled to dispute Ricky’s right to apply for and seek registration of the Service Marks, and that Jason’s filing of the Fine Elite Application in August 2006 was a repudiatory breach of the Hero Elegant Agreement.

19.  I agree that reading the definition of Service Marks in clause 1 and clause 14.4 of the Hero Elegant Agreement together, the parties should be taken to have acknowledged and agreed that Ricky was the person entitled to apply for and to seek registration of the Service Marks in his name, so that Hero could be granted the exclusive licence contemplated under the Hero Elegant Agreement, to use the Service Marks for the purpose of the Business during the continuance of the Hero Elegant Agreement.

20.  Jason claims that the ownership of the Service Marks cannot be construed as a term of the contract, as the Service Marks had never been an issue which was discussed prior to the execution of the Hero Elegant Agreement.  It was argued that the objective of the Hero Elegant Agreement was the vesting of the 31% of the shareholding in the Itamae Companies and restaurants in Fine Elite, for the benefit of Daisy and Jason.  Hence, it was denied that Ricky’s sole ownership of the Service Marks and his right to use and grant licences to use the Service Marks was the “common basis” for the execution of the Hero Elegant Agreement, or a condition precedent for Ricky’s execution of the Hero Elegant Agreement, as Ricky claims in his Re-amended Defence. 

21.  It must be noted that the Hero Elegant Agreement was executed by the parties who were at all material times acting under legal advice.  The agreement went through various drafts, and was revised as a result of discussions and negotiations made by the parties, all at a time when the preparatory work for the listing of the Ajisen Group was in its final stages.  Even if it was true that the matter of the Service Marks application and registration was not specifically raised for detailed discussion (which Ricky denies), I cannot accept that any party can suggest that it was not aware of the existence of the definition of Service Marks in clause 1, and clause 14 of the Hero Elegant Agreement.  It would be just as futile to suggest that any party should not be bound by clauses 1 and 14 of that Hero Elegant Agreement because it did not know the existence of the provisions and did not understand their meaning and effect.

22.  Although Jason did claim in his testimony in court that he had not read clause 14, nor the provision in the Hero Elegant Agreement which refers to the Service Marks being applied for in the name of Ricky, and that he was not concerned about the Service Marks, he accepted that he had left the preparation of and discussions on the Hero Elegant Agreement to Eugene Wong (“Eugene”), who was a director of the Ajisen Group and agent for Jason and Daisy, to Eugene’s staff, and to Francis Chan (“Francis”) who was the solicitor acting for the Ajisen Group, if not for Jason and Daisy.  The evidence of Jason and of Vincent Lee (“Vincent”, the General Manager of Ajisen and a relative of Daisy and Jason) was that he had read, checked and explained the Hero Elegant Agreement to Jason.  Vincent himself was aware of the provisions of clause 14 and the definition of Service Marks.  His evidence was that he had doubts as to whether Ricky was in a position to grant a licence to Hero for the use of the Service Marks in Hong Kong (since he knew that Ricky had only applied for registration in PRC) but had kept silent about his doubts as he considered that it was Ricky’s problem.  Jason and Vincent also accepted that Francis had explained the contents of the Hero Elegant Agreement to Jason and Daisy.

23.  Whether or not Jason knew of or understood the definition of the Service Marks and clause 14 of the Hero Elegant Agreement before he signed the Agreement, he is bound by them.

24.  On construction of the Hero Elegant Agreement as a whole and in the context of the factual matrix of the case, I reject the argument that the ownership and Ricky’s successful registration of the Service Marks was not important and should not constitute a condition of the Hero Elegant Agreement. I do not consider that the Hero Elegant Agreement was only to vest 31% shareholding in Hero to Jason and Daisy through Fine Elite.  The Hero Elegant Agreement was a shareholders’ agreement, to govern the rights and liabilities of the shareholders, so as to “maximize profits for Hero” as the Agreement recites.  The Hero Elegant Agreement was something which Jason and Daisy had been pressing for, to regularize (on their case) the operation of the Itamae restaurants as an extension of the Ajisen Business.  An important aspect of the Hero Elegant Agreement was to provide for the Business to be carried on by Hero (the corporate vehicle to be set up for this business) in the operation and management of the chain of sushi restaurants using the Service Marks.  The Service Marks were obviously of importance and value to the Business of Hero, and it was important that Hero should be able to use and exploit the Service Marks.  It cannot be that the application for registration of the Service Marks was not important, such that it would not be raised or considered during the negotiations for the Hero Elegant Agreement and for the licence to be granted thereunder to Hero.  I accept on the evidence that it was raised and accepted by all concerned that Ricky had applied for registration of the Service Marks. This is borne out by the evidence of Ricky’s solicitor, Gary Leung (“Gary”) and from the documents adduced at trial.

25.  Although Ricky came to accept in his testimony in court that he had not told Daisy and Jason at the time of the 2004 Agreement that the Service Marks belonged to him and that he could open further Itamae restaurants on his own, he maintained that he had informed Eugene during the negotiation of the Hero Elegant Agreement in July or August 2006 that it must deal with the ownership of the Service Marks, as a “precondition” to his execution of the agreement.  This is corroborated by Gary’s evidence, that after Gary had informed Ricky that the draft of the Hero Elegant Agreement Gary had received did not contain any reference to Ricky’s ownership of the Service Marks, Ricky had said to him that he had told Eugene before that the Service Marks were his, and that he had applied for registration of the same.  According to Gary, Ricky told him that he would speak to Eugene directly on the draft agreement, and following that, the next drafts of the Hero Elegant Agreement Gary received contained references in the definition of “Service Marks” to Ricky’s current application for registration of the same, and amendments to what ultimately became clause 14 of the agreement.  Whether Ricky had used the term “condition precedent” in his discussions is immaterial to my judgment.  This is more likely to be legal jargon employed in pleadings.  On the whole, having regard to Ricky’s involvement in the initial setting up of the Itamae restaurants and the design of the Service Marks, it is more likely than not that Ricky would have made it clear to Eugene that the Service Marks was his.  It was more consistent with his egoistic character that he would make such a claim in the negotiations for the Hero Elegant Agreement.

26.  I also accept the submissions made by Leading Counsel for Ricky that in the circumstances of this case, adverse inferences can be drawn from the fact that Fine Elite had chosen not to call Eugene and Francis as witnesses to refute Ricky’s case.  As early as November 2009, Ricky had asserted in his affirmation that he had discussed his ownership of the Service Marks with Eugene and had made it clear to Eugene that he would only be signing the Hero Elegant Agreement if the Service Marks were to be solely owned by him, and to be registered in his name.  Ricky continued so to assert in his witness statement filed in October 2011, and to claim that in their negotiations on the Hero Elegant Agreement, he had discussed matters directly with Eugene, and not Jason, Daisy or Vincent, as to the ownership of the Service Marks, and the licences to be granted for the use of the Service Marks.

27.  The evidence of Eugene and Francis are also important in relation to Ricky’s claims of his repudiation of the Hero Elegant Agreement in December 2006.

28.  I consider that Ricky’s evidence establishes a prima facie case of his insistence on the ownership of the Service Marks and that the Hero Elegant Agreement had to provide for his ownership of, and his rights in, the Service Marks.  Notwithstanding that, Fine Elite chose not to call either Eugene or Francis, who should be able to give evidence on matters concerning the negotiations and discussions with Ricky.  I agree that in the circumstances of this case, an inference can be drawn that even if Eugene or Francis were to be called, their evidence would not displace Ricky’s evidence (Ip Man Shan v Ching Hing Construction [2003] 1 HKC 256).

29.  It was argued on behalf of Fine Elite that clause 14 does not amount to a term or condition that Ricky was entitled to register the Service Marks in his name or that he was the owner of the Service Marks.  If the Service Marks are not or cannot be registered in his name, there is no breach of clause 14 and the only consequence is that Fine Elite would not be entitled to compel or require Ricky to grant the exclusive license to Fine Elite pursuant to clause 14.  It was also argued that clause 14 was inserted for purposes of imposing undertakings only on Ricky for the protection of the interests of Fine Elite and Hero.

30.  If it was important for Fine Elite and Hero to have the undertakings of Ricky to grant a licence to Hero to use the Service Marks for the Business, it was important that there be a licence which would confer the benefits of the use of the Service Marks on Hero for its Business.  Although Hero can use the name and mark “ITAMAE SUSHI” “板前壽司” without registration, the parties knew that Ricky had made an application for registration of the Service Marks, and clearly intended that the benefit of the registration of the Service Marks should vest in Hero.  The benefits of a registered mark are obviously more than those of an unregistered mark.  It is easier for the owner and licensee of a registered trademark to institute proceedings for infringement of the mark.  I do not accept that either the application for the registration of the Service Marks, or the licence for use of the Service Marks, can be said to be unimportant provisions, simply because there can be a licence without the registration of the Service Marks.

31.  Although it is true that clause 14 and the definition of Service Marks do not expressly provide for Ricky being the owner of the Service Marks, as between Ricky and Fine Elite, the latter acknowledged by these provisions that Ricky had applied in his name for registration of the Service Marks, that the application was still current or pending, and did not dispute or object to these matters, but recognized them in express terms.  In my view, clause 14 is clearly an acknowledgment that Ricky had the right to grant a licence for the use of the Service Marks, a right which only the owner of a trade mark can have. I cannot see how Fine Elite can in the circumstances turn around and deny that Ricky had the right to apply for and to pursue his application for registration of the Service Marks, or take steps to oppose or defeat Ricky’s application. 

32.  I accept Ricky’s case that the Hero Elegant Agreement was executed on the common basis that Ricky was the owner or otherwise the person entitled to apply for the registration of the Service Marks and to grant the licence for the use of the Service Marks to Hero. 

33.  I also accept that it was an implied term of the Hero Elegant Agreement that neither Fine Elite nor Jason and Daisy (who used Fine Elite as the corporate vehicle to obtain the benefit of the Hero Elegant Agreement) would dispute, prevent, obstruct or hinder Ricky’s application for registration of the Service Marks.  Having considered the Hero Elegant Agreement as a whole and the background facts at and before the date of the Hero Elegant Agreement, I am satisfied that the insertion of the term is necessary to give business efficacy to the Hero Elegant Agreement, and that the term is one which the parties would obviously have intended if they can be assumed to be reasonable (adopting the criteria in BP Refinery (Westernport) Property Ltd v Shire of Hastings (1978) 52 ALJR 20, and Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187).

34.  The definition of Service Marks refers to Ricky’s “current” application for registration, without reference to the application being made in or confined to PRC.  The licence granted by Ricky to Hero under clause 14 extends to worldwide.  I see no basis for reading clause 14.4 of the Hero Elegant Agreement to have effect only with regard to Ricky’s application for registration of the Service Marks in the PRC.

Whether Fine Elite was in repudiatory breach of the Hero Elegant Agreement

35.  It was argued that Fine Elite’s application for registration of the Service Marks cannot constitute a breach of any condition of the Hero Elegant Agreement, so as to entitle Ricky to repudiate the agreement as he purports to do.

36.  I find that the provisions in the Hero Elegant Agreement with regard to Ricky’s application for and right to seek registration of the Service Marks are important and essential stipulations, and form the basis of the Hero Elegant Agreement.  I have found that considering the Hero Elegant Agreement as a whole, it was not merely to vest 31% shareholding of Hero in Fine Elite, as Jason and Daisy contend.  An essential purpose and stipulation of the Hero Evidence Agreement was for Hero to be licensed to use the Service Marks, with the benefit of a trademark registration.  Ricky agreed to grant the licence to Hero for the use of the Service Marks which are the subject matter of his current application.  It was one of the practical objects which the Hero Elegant Agreement was intended to achieve.  I am satisfied that the application for registration of the Service Marks and the licence to confer the benefits of the use of the registered Service Marks go directly to the substance of the Hero Service Agreement, and are essential to its very nature.

37.  On 9 August 2006, Fine Elite applied to register the Service Marks in Hong Kong, after Jason found out that Ricky had applied for registration of the Service Marks in PRC.  This was before the execution of the Hero Elegant Agreement.  Jason claimed in his witness statement that since Ricky had failed to allot shares in the second and third Itamae restaurants to Daisy and himself, and as they doubted Ricky’s sincerity in honouring the 2004 Agreement, the application by Fine Elite was made “to protect the proprietorship of the Itamae Service Marks from future abuse and use it as a leverage” to ensure that Ricky would honour the 2004 Agreement. 

38.  Notwithstanding the provisions and acknowledgments contained in the Hero Elegant Agreement, the Fine Elite Application made in August 2006 was never mentioned to Ricky prior to the execution of the Hero Elegant Agreement.  Nor did Jason take any step to withdraw the Fine Elite Application after the execution of the Hero Elegant Agreement. 

39.  Ricky had to take steps to oppose the Fine Elite Application, since the Service Marks could not be registered in Ricky’s name in view of the earlier application made by Fine Elite.  In making the Fine Elite Application, Fine Elite was asserting to be the owner of the Service Marks, when there was no basis for it so to claim.  As Leading Counsel for Ricky highlighted, Fine Elite was only acquired by Jason in June 2006, by which time 3 Itamae restaurants were already in operation.  There is sound basis to refer to the Fine Elite Application as having been made in bad faith.   In pursuing its application instead of withdrawing it after the execution of the Hero Elegant Agreement, Fine Elite was continuing the assertion and claim in its application to be the owner of the Service Marks and to be entitled to registration of the Service Marks in its name.  This was in breach of the Hero Elegant Agreement in so far as its express acknowledgment of Ricky’s right to make the application for registration of the Service Marks in his name is concerned, and in breach of the implied terms referred to in paragraph 33 above.

40.  In view of my finding (paragraph 36 above) that the provisions in the Hero Elegant Agreement with regard to Ricky’s right to apply for registration of the Service Marks in his name are important to the contract, and that the breach of Fine Elite goes directly to the substance of the Hero Elegant Agreement, I find that the breach may fairly be considered by Ricky as a substantial failure by Fine Elite to perform the Hero Elegant Agreement (Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003, 1012).  The breach of these provisions amounts to Fine Elite’s repudiation of the Hero Elegant Agreement.

Whether Ricky had accepted Fine Elite’s repudiatory breach

41.  In short, Ricky’s claim of repudiation and acceptance is that after he had discovered the Fine Elite Application, he confronted Jason and then had called off the Hero Elegant Agreement in December 2006.  Ricky’s case has been attacked as being unreliable, for having evolved through various versions between August 2008 when the Defence was filed, and when evidence was given by Ricky and Gary at trial.

42.  The dispute on Ricky’s alleged acceptance of Fine Elite’s repudiation turns on events which took place in November or December 2006.  I would not expect the witnesses to be able to recount in small details the events which allegedly took place at a meeting in December 2006, such as the exact words spoken during a conversation, where exactly the conversation took place, all the persons present when the words were spoken, and the response of the persons present when various words were spoken.

43.  The evidence shows that after the execution of the Hero Elegant Agreement, the parties were attending to matters in the final stages of the listing of the Ajisen Business, and many meetings took place in the offices of iOne at Chater House.  These meetings were often attended by Eugene and Francis, and some or all of Ricky, Gary, Jason, Daisy and Shigemitsu.  Ricky’s applications for registration of the Service Marks in PRC were granted in September 2006.  On 26 October 2006, Gary filed the applications for registration of the Service Marks in Hong Kong on Ricky’s behalf.  Gary’s evidence is that he learned of the Fine Elite Application on 27 November 2006, and thereafter, he confronted Jason at a meeting in iOne.  According to Gary, he asked Jason to rectify or put right the Fine Elite Application, or he would have to tell Ricky about it, and that Ricky would blow his top.  The evidence of Gary is that he had also spoken to Eugene and Francis at iOne about the Fine Elite Application.  According to Gary, Jason refused to withdraw the Fine Elite Application, and when Gary informed Ricky that Fine Elite had applied for registration of the Service Marks in Hong Kong, Ricky became very angry, and declared that he would no longer regard the Hero Elegant Agreement as binding.

44.  Leading Counsel for Fine Elite has criticized the evidence of Gary and Ricky as being inconsistent, and unbelievable.  However, it appears to me that there are in fact common features in the evidence of Gary, Ricky and Jason as to the events of the meeting in December 2006.  These common features are as follows.  Gary had spoken with Eugene and Francis and told them of the Fine Elite Application filed by Jason.  Jason had spoken to Eugene and Francis, who asked him about the Fine Elite Application and whether he was prepared to withdraw or return it (“take it back out”).  Gary had informed Ricky of the Fine Elite Application.  Ricky had thrown a tantrum at the offices of iOne and claimed (at least) that he would not proceed with the listing of Ajisen.

45.  Bearing in mind that the confrontation had taken place in December 2006, and that there had been a regular series of meetings taking place at iOne at the material time at the end of 2006, both before and after the material meeting in question, I cannot expect any of the witnesses to have a clear recollection of whether the dialogue between Gary and Ricky had first taken place in the corridor outside the large conference room, or at the door of the large conference room, or inside the large conference room.  Nor would I expect either Ricky or Gary to have a clear recollection of whether Daisy was in the conference room, when Gary spoke to Ricky about the Fine Elite Application, and when Ricky lost his temper and declared that he would not be bound by the Hero Elegant Agreement.  However, I accept from the evidence of both Gary and Jason that it is more probable than not that when Ricky learnt of the Fine Elite application from Gary, he would have lost his temper and kicked up a storm.  From his perspective, he had agreed to the Poons’ taking 31% of the Itamae restaurants.  He had told Eugene that the Hero Elegant Agreement had to provide for the Service Marks being his.  He had signed the said Agreement on that basis, and on the basis that the Service Marks would be licensed to Hero.  Then it transpired that Jason had in fact applied for registration of the Service Marks behind Ricky’s back.  If, as Jason claims, Ricky would lose his temper over even a small matter, these would constitute significant reasons for Ricky to kick up a storm and to disown the Hero Elegant Agreement.

46.  Gary’s evidence is credible.  Being the person who was first informed of the Fine Elite Application after he lodged Ricky’s application in Hong Kong, he was obviously surprised by the news.  According to Gary, and as Jason also claims, relations between Ricky, Jason and Daisy were already strained before the negotiations on the Hero Elegant Agreement and the Ajisen listing.  Gary knew that if Ricky should find out about the Fine Elite Application, he would blow his top and the listing of the Ajisen Group might be jeopardized.  According to Gary, he made attempts to resolve the problem peacefully, and during one of the meetings at iOne, he spoke to Eugene and Francis as intermediaries, to seek their help with confronting Jason.  Gary claims that both Eugene and Francis were shocked when they heard of the Fine Elite Application, and he told them that unless Jason would agree to withdraw the Fine Elite Application immediately, he would have to break the news to Ricky.

47.  Jason’s evidence is that he had received a call from Gary, who had found out about the Fine Elite Application and asked Jason if he would rectify or take care of it.  On Jason’s own testimony, he did not give Gary a reply, or indicated that he would only do so if Ricky would transfer the shares in the Itamae restaurants to Daisy and himself.  This in all probability led to Gary speaking to Eugene and Francis, as he claims, to seek their help before breaking the news to Ricky.

48.  Jason also accepts that at a meeting in the offices of iOne in early December 2006, the “two professionals” (which can only mean Eugene and Francis) spoke to him about the Fine Elite Application. 

49.  In my view, Jason’s denial of any knowledge of Ricky’s purported cancellation of the Hero Elegant Agreement is disingenuous.  He attempts to do this by first denying any direct communication with Ricky, then by denying knowledge that Ricky was angry after being told of the Fine Elite Application.

50.  On the first point, Jason conceded in cross-examination that he had spoken to Gary, and then to Eugene and Francis, about the withdrawal or rectification of the Fine Elite Application, and claimed only that the intermediaries did not tell him that Ricky had cancelled or denounced the Hero Elegant Agreement.  Although Jason originally claimed that he had not said no to Gary’s request to rectify the Fine Elite application, he claims that his response to Eugene and Francis was that he would only rectify the Fine Elite Application if Ricky transferred the 31% shareholding in the Itamae restaurants back to Daisy and himself, and this was tantamount to a refusal to withdraw the Fine Elite Application.  As Leading Counsel for Ricky pointed out, the vesting of the Poons’ 31% shareholding in the Itamae restaurants had already been dealt with in the Hero Elegant Agreement, which the parties had signed in September 2006.  The evidence also shows that documents for the issue and investing of the 31% shares in Hero Elegant had been prepared in June 2006, first to Liang Yan Ping and then to Vincent, as instructed by Jason and his camp. 

51.  Jason’s attempts to deny any knowledge of Ricky’s angry outbursts at iOne are likewise unbelievable.  This is demonstrated by his own evidence that after speaking to Eugene and Francis, he left in a hurry or wanted to leave in a hurry, as he expected that Ricky would become angry and that quarrel would ensue after his learning of the Fine Elite application and what Jason had told Eugene, Francis and Gary.  It is the evidence of both Gary and Jason that the atmosphere at iOne became very tense and awkward.

52.  Gary’s evidence is that when he learned from Eugene and Francis that Jason refused to return the Service Marks to Ricky, he told Ricky, and that Ricky was first shocked, then infuriated.  Gary heard Ricky demand in a loud voice that the Service Marks should be returned to him as they were his, and that if they were not returned, he would not recognize or comply with the Hero Elegant Agreement, and would not proceed with the listing.

53.  Whether Ricky had declared in the conference room in the presence of Daisy, or in the corridor in Jason’s presence or at the door of the conference room within Jason’s earshot, that he would not recognize the Hero Elegant Agreement, or that he did not consider the Hero Elegant Agreement to be binding, I consider that Ricky had made it clear to Francis and/or Eugene, as Jason’s representative and “go-between” (as Jason referred to Eugene and Vincent), that he considered himself as no longer bound by, or having been discharged from, the Hero Elegant Agreement.   Daisy admitted in cross-examination that she had heard, either from Jason or from Vincent, in December 2006 that Ricky had claimed to cancel the Hero Elegant Agreement.  Her attempt to change her evidence to having heard about the cancellation only after the listing of Ajisen is not convincing.  She had confirmed in her evidence that it was before the listing of Ajisen that she had heard from Francis and Eugene that Jason had made the Fine Elite Application.  It is also her claim that she had not known about the Fine Elite Application before it was raised by Ricky’s side.  This lends some support to Gary’s and Ricky’s evidence on the events and timing of the meeting in iOne.

54.  Again, Eugene and Francis were not called as witnesses on the important issue of Ricky’s alleged acceptance of repudiation of the Hero Elegant Agreement.  For the same reasons set out in paragraphs 26 to 28 above, I consider that I can draw the inference that even if called, their evidence would not displace Ricky’s and Gary’s.

55.  From the evidence, it appears that neither Ricky nor Fine Elite/Jason took any step in the performance of the Hero Elegant Agreement after December 2006.  Even Jason accepted that the professionals involved in the listing all knew that the Hero Elegant Agreement had become stale.  I have taken into account the fact that in February 2007 there were e-mails from Eugene which suggest that the parties picked up negotiations again on the possibilities of Ricky purchasing Jason’s and Daisy’s interests in the Itamae restaurants.  However, it is equivocal whether these negotiations on the eve of the listing of the Ajisen Group evidence the parties’ acknowledgment of the existence or continuation of the Hero Elegant Agreement.  Daisy accepted in cross-examination that such negotiations were in respect of Ricky’s purchase of her and Jason’s shareholding in the first Itamae restaurant, which they continued to hold, through Smart Wave, irrespective of the Hero Elegant Agreement.  On the other hand, the more overwhelming evidence is that around March 2007 and after the Hero Elegant Agreement had been purportedly terminated by Ricky, Daisy set-off the balance of monies due by the Itamae Companies to the Ajisen Group against the dividends payable to Ricky in relation to the Ajisen Group, evidencing the treatment of the Itamae Companies as belonging to Ricky personally.  These all support the fact that the parties had treated the Hero Elegant Agreement as having been discharged, as Ricky claimed in December 2006.

Whether Fine Elite is entitled to an order for specific performance of the Hero Elegant Agreement, or to damages

56.  I have found Fine Elite to be in repudiatory breach, which repudiation was accepted by Ricky.  As such, it is not necessary to find whether Fine Elite is entitled to specific performance, or to damages for Ricky’s alleged breach.

57.  If I should be wrong on repudiation and acceptance, I consider that Fine Elite is not entitled to specific performance, since it purported, by the Fine Elite Application, to be the owner of the Service Marks and to be entitled to registration of the Service Marks in its name, when it had no basis at all so to claim.  An application for registration made by someone not entitled to the mark is made in bad faith, even if the course of action falls short of dishonesty.  “Bad faith” has been held to be wide enough to cover advertent behavior which involves no breach of duty, not necessarily dishonest, but falling short of acceptable commercial behavior (DAAWAT Trade Mark [2003] RPC 11, DEMON ALE Trade Mark [2000] RPC 345).  On the evidence adduced in this case, neither Jason nor Fine Elite can be shown to have any right to claim ownership of the Service Marks.  In view of Jason’s evidence on his design of the Service Marks, which I find to be incredible, and his admission that the Fine Elite Application was filed as a leverage in his own negotiations with Ricky, I consider his claim, of the Fine Elite Application having been made for the benefit of the Itamae Companies, to be a bare assertion made after the event. 

58.  In any event, the claim that the Fine Elite Application was held on trust for, or for the benefit of, Smart Wave or Hero, is contradicted by the fact that after Fine Elite had assigned the Fine Elite Application to Jason in January 2007, when Jason sold his interests in Fine Elite to Got’a Place Holdings Ltd (“Got’a Place”) in March 2007, the sale included the Service Marks.  There was no reference to the Service Marks being held on trust for Hero, or any other party.

59.  The Fine Elite Application was not made in good faith, and having come to court with unclean hands, Fine Elite should not be allowed any equitable or discretionary relief from the court.

Whether Ricky was in breach of fiduciary duties as director of Smart Wave

60.  Jason claims in the derivative action on behalf of Smart Wave that Ricky acted in breach of his fiduciary duties as a director of Smart Wave in using the Service Marks to operate sushi restaurants other than the one operated in the name of Smart Wave.

The Itamae restaurants

61.  Irrespective of whether Ricky is the owner of the Service Marks, it has never been pleaded that Smart Wave is the owner.  On Jason’s or Fine Elite’s case in HCA 1269/2008, the shareholders of the Ajisen Group (Daisy, Jason, Ricky and Shigemitsu) agreed to develop Japanese-style chain restaurants using corporate vehicles in which all of them would be interested as shareholders, and it was pursuant to such agreement that Smart Wave was incorporated in 2004 to manage and operate the Itamae restaurant at Granville Road only.  Under the Hero Elegant Agreement, which was signed to resolve the disputes over Daisy’s and Jason’s claims to the Itamae restaurants, Ricky and Fine Elite were to become shareholders of Hero, which with its subsidiaries were to continue and carry on the business of operating chain restaurants using the Service Marks. 

62.  On the case advanced by Jason and Daisy, the shareholders of the Ajisen Group had agreed “to develop chain sushi restaurants in furtherance of the then existing business” (of the Ajisen Group), and had further agreed that “separate corporate vehicles would be formed to hold the interest of the said chain sushi restaurant business to be established” (emphasis added), following the same shareholding of the Ajisen Group (paragraph 12 of Jason’s witness statement made on 24 October 2011).  There is no doubt that, even on the Poons’ case, the intention was for a chain of Itamae restaurants to be established, using different corporate vehicles to hold and to operate different restaurants in the chain, all using the Service Marks.   The Hero Elegant Agreement also envisaged this.  Clause 14.5 provides for all chain restaurants conducting the business defined in the agreement to be owned and operated by “a Group Company”, with Hero being the holding company of all such group companies owning and operating the business of the sushi restaurants.

63.  Hence, as one of the restaurants in the chain, Smart Wave was never intended by its shareholders to have the exclusive right to carry on the sushi restaurant business using the Itamae name or Service Marks.  Even on Jason’s and Daisy’s case, the shareholders of Smart Wave knew, intended and agreed that other companies would be set up to operate other sushi restaurants, using the Itamae name and Service Marks.  I agree with Leading Counsel for Ricky that Smart Wave is not in a position to complain about the use of the Service Marks by other companies, or of the existence and operation of other sushi restaurants in the chain.  Ricky, as a director of Smart Wave, cannot be said to have acted in breach of his duties to Smart Wave by operating other sushi restaurants using the Service Marks.

The Itacho restaurants

64.  In my view, the operation of the “Itacho板長” restaurants is another matter.  It is not Ricky’s case that the Itacho sushi restaurants is part of the Itamae chain.  He claims that the “ITACHO板長” trademark which he developed is different to the Itamae mark.  He also claims that as the owner of the ITACHO trademark, he is entitled to use and license others to use the mark in the operation of sushi restaurants.

65.  Whereas I accept that the shareholders of Smart Wave knew and hence had consented to the operation of other sushi restaurants in the chain by use of the Service Marks and the name “Itamae”, there is no evidence in this case on which I can find that the shareholders of Smart Wave had consented to the operation of sushi restaurants under the “ITACHO” name.  As a director of Smart Wave, it is undisputable that Ricky was under a fiduciary duty to act in the best interests of Smart Wave, and prima facie, it is against the interests of Smart Wave for its director Ricky to operate and consent to the operation of a competing sushi restaurant, under the name of “ITACHO 板長” which I consider to be confusingly similar to the name “ITAMAE板前”.  Due to the similarity between the names “ITAMAE 板前” and “ITACHO板長”, I consider that the inevitable inference is that customers of the Itamae restaurants would patronize the Itacho restaurants in the belief that they are connected or related, such that the Itacho restaurants benefit from the goodwill in and reputation of the Itamae name.  Leading Counsel for Ricky argued on his behalf that the Itacho restaurants complement, rather than compete with, the Itamae restaurants and the Itamae business, but there is no evidence whatsoever from Ricky to support such claim.

66.  It was further argued for Ricky that the Hero Elegant Agreement was a global compromise and Jason, Daisy and Fine Elite should be taken to have consented to Ricky’s operation of the Itacho sushi restaurants as well, when they had acknowledged Ricky as the owner of the Service Marks.  The argument is that Smart Wave should likewise be taken to have waived or settled any claim it may have in relation to Ricky’s operation of any competing sushi restaurant in the name of Itacho.  These are matters which were never pleaded in Ricky’s Defence to either HCA 1269/2008 or HCA 304/2011. 

67.  In any event, Smart Wave is not a party to the Hero Elegant Agreement.  Its shareholders are different to the shareholders of Fine Elite.  I accept the submission made by Leading Counsel for Smart Wave that in the absence of assent by all shareholders of Smart Wave (as required under the principle in Re Duomatic Ltd [1969] 2 Ch 365) ) the Hero Elegant Agreement cannot be binding on Smart Wave.  The Hero Elegant Agreement makes no reference to the “ITACHO” mark, nor to Ricky’s rights in the “ITACHO” mark, since the business of the Itacho restaurants only commenced in May 2007, and was not in operation at the time of the execution of the Hero Elegant Agreement.  Nor does the Hero Elegant Agreement make provision for the relationship between Fine Elite’s shareholding of 31% in Hero, and the 34% shareholding held by Jason and Daisy in Smart Wave, and whether and how the difference was to be resolved.  The court cannot rewrite the Hero Elegant Agreement for the parties, so far as their respective rights and interests in Smart Wave are concerned, after the Hero Elegant Agreement.  I can find no basis to conclude that Smart Wave had knowledge of, or in any way compromised or waived, its claim and remedies against Ricky in respect of his operation of the Itacho sushi restaurants.

The remedies to which Smart Wave may be entitled as against Ricky

68.  Smart Wave continued its operation of the first Itamae restaurant until 2010, when it ceased business.  After that, there was no business of Smart Wave with which the sushi restaurants operated under the Itacho name could compete. I find that Smart Wave is entitled to claim from Ricky such damages as it may have sustained as a result of Ricky’s breach of his fiduciary duties as director, in operating sushi restaurants under the “ITACHO板長” name, in competition with Smart Wave’s business until this was ceased in 2010.  These damages are to be separately assessed.

Conclusion

69.  I dismiss Fine Elite’s claims made in HCA 1269/2008, with costs to Ricky, which costs include certificate for two counsel.

70.  I allow Smart Wave’s claim against Ricky in HCA 304/2011 for damages to be assessed, but since the claim only relates to Ricky’s operation of the Itacho restaurants, I make an order nisi that Ricky is only liable for 50% of the costs of HCA 304/2011. 

71.  In view of the fact that the substantial part of the trial was devoted to HCA 1269/2008 and the claims made in relation to the Service Marks and the Itamae restaurants, I will further make an order nisi that Ricky is entitled to 75% of the costs of the trial.