KINETICS MEDICAL AND HEALTH GROUP COMPANY LTD AND OTHERS v. DR TSE IVAN CHEONG YAU

CACV 228/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 228 OF 2013

(ON APPEAL FROM HCA NO 1115 OF 2010)

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REASONS FOR JUDGMENT

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Hon Lam VP:

1.  I agree with the reasons given by Yuen JA.

Hon Yuen JA:

2.  This is the defendant’s appeal from a judgment of Deputy Judge Marlene Ng given on 7 October 2013 in which judgment was given to the plaintiffs in the sum of $959,994 on their claim and judgment was given to the defendant in the sum of $174,240 on his counterclaim, resulting in judgment to the plaintiffs (after set-off) in the sum of $785,754 with interest from the date of writ.  As for costs, the learned judge’s final order (subsequent to an order nisi) was that the defendant was to pay half of the costs of the action (including half of the costs of the claim and half of the costs of the counterclaim). 

3.  At the conclusion of the hearing before us, we dismissed the appeal.  The appellant did not object to costs of the appeal to follow the event, or to the respondent being given certificate for two counsel.  My reasons for dismissing the appeal appear below.  

Background

4.1   Briefly, the relevant background is as follows.  The 1^st plaintiff company is in the business of operating medical clinics.  The 2^nd and 3^rd plaintiffs are medical practitioners involved with the 1^st plaintiff although the 1^st plaintiff was managed by David Chan Ho Yin (“DC”).

4.2.   In 2004, the 1^st plaintiff started a clinic in Tsing Yi (“the Clinic”) via a corporate vehicle called Kinetics Radio-Diagnostic Centre Ltd (“the Company”).       

4.3.   In 2005 the defendant graduated from medical school in Hong Kong.  After graduation he worked at a public hospital.  Whilst working there he was introduced to DC.

Independent Contractor Agreement

5.1   In February 2006 the defendant signed a written Independent Contractor Agreement (“ICA”) with the Company.

5.2.   Under the terms of the ICA, the defendant was to provide medical services to patients of the Clinic from 1 July 2006 to 31 March 2007 as an independent contractor, but with the right to acquire the Company during the contract period in accordance with terms set out in Appendix 1 of the ICA.

6.  In July 2006 the defendant started working at the Clinic.  In accordance with the terms in Appendix I, an amount of $10,000 was deducted every month towards payment for the shares of the Company. 

7.  The judge found that in December 2006 the parties had a meeting at which the plaintiffs agreed to continue to provide support for the defendant (although the specific kind of support was not canvassed), and on that understanding, the defendant decided to acquire the shares of the Company.

Transfer of Ownership of the Company

8.1   On 22 December 2006 the parties signed a written document entitled Business Ownership Transaction Memorandum (“the Memorandum”) whereby the plaintiffs agreed to sell and the defendant agreed to buy the shares of the Company for a sum of $1,499,994, to be paid in instalments as follows:

Tranche	Date of Payment	Amount (HKD)	Remarks
(1)	Before 31.12.2006	$150,000
(2)	Before 31.1.2007	$150,000
(3)	Before 28.2.2007	$150,000
(4)	From 1.7.2006 to 31.3.2007	$90,000	Received every calendar month *
(5)	Every 4 consecutive calendar months	$100,000	Starting from 1.4.2007

* This refers to the deduction of $10,000 every month which had started in July 2006 and which continued until March 2007.

8.2.   It is important to note that it was an express term of the Memorandum that “all the above payment should be completed before 31^st March 2010".

Payments

9.  The defendant made payments of Tranches (1) to (4) inclusive.  The balance payable was therefore $959,994 (“the Balance Price”).

Inquiry on flexibility in payment dates

10.1   However on 8 March 2007, before payment of the instalments of Tranche (5) was due to start, the defendant wrote an email to the plaintiffs’ solicitors saying:

“As of this moment, the payment dates listed in the agreement are quite ‘rigid’. We would like to make the payment on each date more flexible in case of clinic low income, How can we put this into the agreement?” (Emphasis added).

10.2   This was followed by email correspondence between the parties.  The defendant did not pay the instalment of $100,000 (or any part thereof) on 1 April 2007.

Agreement and Addendum

11.  On 7 May 2007 the parties signed two documents, an agreement entitled “Agreement for repayment of consideration money” (“the Agreement”) and a side agreement entitled “Addendum for The Agreement for repayment of consideration money” (“the Addendum”).

-  The Agreement

12.1   In the Agreement itself, the recital stated that the plaintiffs have sold the shares of the Company to the defendant for $1,499,994 and have transferred the said shares to the defendant, and the defendant acknowledged that the consideration for the shares was due, and agreed to pay it by way of instalment payments.

12.2.   Clause 2 listed 14 instalments, the first 4 of which corresponded to Tranches (1) to (4) above (which, by then, had been paid).  The 5^th to 14^th Instalments, which amounted to the Balance Price, commenced with a payment of $100,000 on 1 April 2007 and was equivalent to a payment of $100,000 every four months (as stipulated under the Memorandum) with a final amount of $59,994 to be paid on or before 1 April 2010.

12.3.   Clause 3 contained an agreement whereby the defendant agreed to make reimbursements to the plaintiffs for decoration costs and a rental deposit (“the reimbursement sum”), also by 1 April 2010.               

12.4.   Clause 4 provided that time shall be of the essence of the agreement, and that no time or indulgence given shall be construed as a waiver of any rights thereunder.

-  The Addendum

13.1   In the Addendum however, the following were agreed:

“1) There will be a grace period to the scheduled payments.

2) The grace period will be exercised if any of the following circumstances occur:

(a) the target net income of the Tsing Yi clinic is not met, and/or

(b) there is inadequate clinical, marketing, or management assistant [sic].

3) During the grace period, the payment amount and date of repayment will be adjusted and compromised by both parties.

4) For the payment schedule, it should be $100,000 every 4 months.

5) For solid concrete SUPPORT, it is identified as the followings:

(a) adequate clinical support are:-

[items listed]

(b) adequate management support are:-

[items listed]sp;

(c) adequate Marketing support are:-

[items listed]

It is agreed that all the above terms and conditions are subject to mutual agreement in writing by both parties before execution.

6) All the other terms and conditions of the said Agreement of the same date remain unchanged”. (Emphasis added).

13.2.   The terms of the Addendum followed the defendant’s suggestions in his email of 30 March 2007 save that the word “cushion” in his email was replaced by the word “grace” in the Addendum.

Events after the Agreement and Addendum

14.1   The judge accepted the defendant’s evidence that the “target net income of the Clinic” meant $53,000 per month and that this was not met until 2009.  The judge found that the parties had agreed in March 2007 that the plaintiffs should provide the services referred to in the Addendum (“support services”).  The judge also found that they were inadequate in some respects. 

14.2.   However the parties did not agree on any adjustments to either the quantum or the date of payment of the 5^th to 14^th Instalments.  The defendant did not pay anything to the plaintiffs from April 2007.  He did not pay the reimbursement sum due on 1 April 2010 either.

Proceedings

15.  In July 2010, three months after the defendant was due to pay the last instalment in April 2010, the plaintiffs issued the writ for payment of the Balance Price.  They also claimed the reimbursement sum (this was subsequently paid and is not material to this appeal).      

16.  The defendant denied that he was liable to pay the Balance Price on the basis that the “target net income of the Clinic” was not met for some time, and that the support services provided were inadequate. He also counterclaimed for damages due to the plaintiffs’ failure to provide support services.

17.  In their Reply, the plaintiffs stated that the “net target income” (referred to as “target net income” in the judgment) had never been specified (para. 28), and that the defendant’s obligation to pay the consideration was not conditional upon the support services, which were provided on a gratuitous basis only (para. 26).  The counterclaim was also denied. 

Judgment

18.1.   After a trial lasting 8 days at which DC, the 2^nd and 3^rd plaintiffs and the defendant gave evidence, the judge found that the parties had indeed agreed to a grace period arrangement as set out in the Addendum, and that:

(1) the “target net income” was $53,000 per month, which had not been achieved in 2007-8, but was achieved by 2009;

(2) the support services provided by the plaintiffs were inadequate, and they were therefore in breach of contract.  However on the defendant’s own case, the plaintiffs were not liable to provide further support services after April 2010.  Therefore the defendant was not entitled to suspend payment of the Balance Price beyond that date.  The only damages sought by the defendant on his counterclaim by the time of trial was an amount of $174,240 for failure to provide orthopaedic specialist support from August 2007 to April 2010.

18.2.   Accordingly the judge gave judgment to the plaintiffs for the Balance Price, but gave judgment to the defendant on his counterclaim.  She held that the defendant would receive a “double benefit” or “double recovery” if he was released from paying the Balance Price and entitled to damages on his counterclaim at the same time.

Appeal

19.  As I understand counsel for the defendant, the ground of appeal amounts to this: the plaintiffs had pleaded only that there was no agreement for a grace period; therefore when the judge rejected that case on the facts, the plaintiffs’ claim to the Balance Price for the shares failed; insofar as the defendant might have enjoyed a “double benefit” or “double recovery” by not having to pay the Balance Price and by receiving damages on his counterclaim at the same time, the defendant had not been put to an election; if he had been put to such an election, he would have elected not to pay the Balance Price and to forego the damages.

Discussion

20.1.   With respect I do not agree.  First I will consider the plaintiffs’ entitlement to the Balance Price. 

20.2.   It is common ground that the defendant has had the shares of the Company transferred to him.  He has not rescinded the agreement for the purchase of the shares.  It is therefore clear that the Balance Price is owing.  Even on the defendant’s own case, “it is not the defendant’s case that his obligation to pay the Balance should be extinguished”.  See paras.19(1) and 19(5) of his Skeleton Argument. 

21.  What then is the effect of the judge’s findings of fact on this obligation to pay the Balance Price? 

Interpretation of the Addendum

22.1.   The judge first found that by clauses 2 and 3 of the Addendum, the parties had agreed that if either of two “trigger” events occurred, the defendant would have a grace period during which he would not be required to comply strictly with the payment schedule in the Agreement, and the parties would agree on payment of a lesser amount for the instalment(s) and/or a later date for payment for the instalment(s) affected by the “trigger” event(s). 

22.2.   Thus, on an objective interpretation of the terms of the Addendum, what the parties contemplated was that e.g. if the defendant did not achieve the target net income of $53,000 during June 2007, then instead of having to pay $100,000 in August 2007 in strict compliance with the Agreement, the parties might agree on his paying say $80,000 in August 2007 (an adjustment of the payment amount), or agree on his paying say $100,000 in September 2007 (adjustment in date of payment), or agree on his paying say $80,000 in September 2007 (adjustment in both the payment amount and date of payment). 

22.3.   However as the defendant’s counsel rightly accepted, the defendant’s obligation to pay the Balance Price was only “suspended”, not “extinguished”.  As the defendant never rescinded the agreement, he was still bound to pay the entirety of the Balance Price, and because clause 3 referred to adjustments “during” the grace period, the indulgence granted was only for the duration of the grace period.

23.  This leads to a consideration of the duration of the grace period.

“Trigger” events for grace period(s)

24.1.   The two “trigger” events were:                               

(1) the failure to achieve a target net income of $53,000 during the month, and  

(2) the failure by the plaintiffs to provide adequate support services.

24.2.   The judge found that the target net income was not achieved after April 2007 but was achieved by 2009.  However the plaintiffs continued to fail to provide support services thereafter.  On the defendant’s own case, the plaintiffs’ obligation to provide support services ceased in April 2010.  Therefore, the “trigger” events and the continuous grace period ended in April 2010.

24.3.   Accordingly from April 2007 to April 2010 the defendant was entitled to (and did) call in aid a continuous grace period during which he could not be held to the strict payment schedule of full payment of $100,000 on each of the specific dates stipulated in the Agreement. 

Failure to agree adjustments

25.1.   Although clause 3 of the Addendum stated that “during the grace period, the payment amount and date of repayment will be adjusted and compromised by both parties”, the parties did not arrive at any compromise agreement for adjustment in payment and/or payment date. 

25.2.   The defendant did not pay anything during the entire period up to and including April 2010.  In doing so, the defendant has obviously reaped the maximum benefit from the agreement, in that throughout the continuous grace period (until its cessation in April 2010), he has acted as if the parties had agreed on an adjustment of the payment amount down to $0 instead of $100,000, and an adjustment of the date of payment of all the instalments until the end of the grace period. 

25.3.   This brings me to an argument by counsel for the defendant that it was unfair that although the judge accepted the defendant’s version of events, he ended up being the “loser” in that he had to pay the Balance Price.  With respect this is misconceived.  If the judge had accepted the plaintiffs’ case and held that there was no agreement on a grace period, the defendant would have had to pay interest on a debt of $100,000 each accruing from the date of each instalment.  As it is, he does not have to do so.      

26.  As for the defendant’s argument that his liability to pay the Balance Price can be postponed after the expiry of the grace period in April 2010, it is contrary to commercial sense to suggest that the defendant can own the Company and at the same time postpone payment of the Balance Price indefinitely (by not coming to an agreement on adjustments). Certainly there is nothing in the Addendum that points to such an agreement, and indeed even if a literal interpretation were to suggest this result (which in my view it does not), it would have to give way to the meaning which the words would have meant to a reasonable person having all the background knowledge which would have been reasonably available to the parties in the situation in which they were at the time of the contract. 

27.  In the present case, the shares of the Company had been transferred to the defendant in December 2006.  He was already legally bound under the Memorandum to pay up the Balance Price by 31 March 2010.  The judge found that the plaintiffs agreed to grant the defendant an indulgence.  It is against commercial reality to suggest that the plaintiffs would have traded their position of strength to one where their receipt of the Balance Price was contingent on at least one matter which was out of their control (the target net income) and also on the defendant’s wish to come to an agreement on amount and time of payment.  It is clear from the Agreement read with the Addendum that the parties contemplated the end of the grace period and the termination of all contractual relations by April 2010.  

28.  As for the defendant’s argument concerning the judge’s reference to “double recovery” or “double benefit”, there is no issue of alternative reliefs or election in the present case.  The defendant has never rescinded the agreement and he accepted that his liability to pay the Balance Price has not been extinguished.  If he had been able to prove that his loss and damages from the plaintiffs’ breach of the agreement to provide support services were greater than the Balance Price, then he could have raised a full set-off and counterclaim,  but in the event the damages proved amounted to $174,240 only, which the judge set off against the Balance Price.

Order

29.  For the above reasons, I dismissed the appeal with costs and certificate for two counsel. 

Hon Kwan JA:

30.   I agree with the reasons for judgment given by Yuen JA.