CHAN LAI YING AND OTHERS v. LEE LIM AND ANOTHER

HCA 1413/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1413 OF 2005

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J U D G M E N T

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I. Introduction

1.  The Plaintiffs^[1] and the Defendants are parties to a settlement deed (“the Deed”) dated 21 May 2005. 

2.  Under the Deed, Ms Chan Lai Ying (the 1^st Plaintiff) agreed to sell all her 60% shareholding in Man Hing Automation Ltd (“MHAL”) to Ms Lee Lim (the 1^st Defendant) (who was then the 40% shareholder of MHAL) for a total sum of HK$16,700,000.

3.  By way of this action, the Plaintiffs claim against the Defendants for HK$7,600,000 as the outstanding payment under the Deed. 

4.  The Defendants do not dispute that HK$7,600,000 has not been settled under the Deed.  They however say that they are entitled to a substantial set-off against this sum by reason of the Plaintiffs’ breach of various warranties under the Deed, and the Plaintiffs’ agreement therein to indemnify Ms Lee’s loss and damage arising from their breach of the warranties.

5.  The Defendants initially sought to set-off some HK$3.9m and RMB3.3m against the liability to pay the HK$7.6m under ten items of the counterclaim.  However, when it comes to closing submissions, the Defendants have dropped a substantial part of the counterclaim, and have reduced it to seven items of claim for the total sums of HK$1,692,704.20 and RMB2,673,973.80.

6.  The Plaintiffs dispute liability on the basis that they were not in breach of the warranties.  The Plaintiffs also in any event dispute the quantum of the Defendants’ counterclaim.

7.  In light of the above, the trial of the action is essentially the trial of the Defendants’ counterclaim.   The issues for trial are therefore, under each of the items of the counterclaim:

(1)  Whether the Plaintiffs were in breach of the relevant warranty.

(2)  If so, whether the breach resulted in any loss and damage.

(3)  If so, whether any of the Defendant could counterclaim the loss and damage against any of the Plaintiffs under the Deed.

(4)  If so, what is the quantum.

8.  Before I deal with each of the items of counterclaim, in order to understand the dispute in the proper context, I will first set out below what I regard as the relevant background facts.

II. Background facts

9.  Unless otherwise stated, the following are not in dispute.

10.  Ms Lee is the wife of Mr Tse Chun Yip (“Mr Tse”) (the 2^nd Defendant).  Mr Tse and his brother Mr Tse Chun Ki (“Mr Tse’s brother”) are the directors and shareholders of a company known as Gainford International Limited (“GIL”). 

11.  Ms Chan is the wife of Mr Yeung (the 2^ndPlaintiff).   

12.  Before the Deed, Mr Tsui King Fai (the 3^rd Plaintiff) had been working as the manager of the engineering department of MHAL and its factory.

13.  GIL is effectively a trading company sourcing and selling principally tailored-made platting production lines to customers.  MHAL is a Hong Kong company which manufactures such production lines through its own mainland factory.

14.  Since 2000, GIL and MHAL have been business partners, in that:

(1)  GIL would place the purchase orders of production lines with MHAL, and MHAL would manufacture the same for GIL through its Mainland factory.   GIL would take 10-15% of the sale price of the production lines as its fees.  The rest would be MHAL’s entitlement.

(2)  Further, GIL would in Hong Kong provide administrative, finance and accounting services for MHAL. 

15.  At the relevant time before the Deed:

(1)  Ms Chan and Ms Lee were respectively the registered 60% and 40% shareholders of MHAL.   They however were not involved in the management and affairs of MHAL.

(2)  MHAL was managed by Mr Yeung and Mr Tse.  They were the masterminds behind it.

(3)  In about mid-2002, MHAL through GIL set up a new factory in the Mainland called 佳輝設備(東莞)有限公司 (“the Factory”).  The Factory took over the stocks and equipments of MHAL’s old factory in the Mainland. 

(4)  MHAL’s only asset was the Factory.

(5)  One Ms Scarlette Leung Oi Yan was the legal representative of the Factory.Ms Leung was a staff of GIL.  She overlooked the accounts and administrative aspects of the Factory and reported to Mr Tse. 

(6)  It was understood between the Yeungs’ and the Tse’s that MHAL would only manufacture for purchase orders placed through GIL, while GIL would place all its purchase orders for production lines with MHAL.

16.  Before June or July 2004, Mr Tse himself and through GIL was responsible for the marketing, general administration and accounting aspects of MHAL, including that of the Factory.  Mr Yeung was responsible for the manufacturing and production aspects of MHAL, including overlooking the operation of the Factory.

17.  Apparently, the business relationship between Mr Tse and Mr Yeung started to deteriorate in around April and May 2004, when Mr Tse sought to be more involved in the manufacturing and production aspects of the Factory.

18.  In about June or July 2004, Mr Tse himself “left” the Factory in the sense that he was no longer involved in its administration.  The reason for Mr Tse’s decision to do so is no longer relevant to these proceedings.

19.  In about January 2005, the Factory started to manufacture orders placed through a company known as Man Hing Plating Engineering Ltd (“MHPEL”).  MHPEL was set up and owned by Mr Yeung.   It is accepted by Mr Yeung at trial that, at that time he tried not to let Mr Tse know about the existence of MHPEL, and the fact that the Factory was manufacturing for purchase orders placed through MHPEL.

20.  In about February or March 2005, it was discovered from GIL’s customers by Mr Tse’s brother and his colleague that the Factory had been manufacturing for MHPEL.  Further, Mr Tse’s brother says he also discovered that, during this time, Mr Yeung had also been informing GIL’s customers that the Factory would no longer manufacture for the purchase orders placed through GIL. 

21.  Mr Yeung denies this and says that it was in fact GIL which, in breach of the understanding between him and Mr Tse, had started not to place any purchase orders with the Factory through MHAL, but with another factory owned by Mr Tse.  This had made the survival of MHAL (and the Factory) difficult.  As a result he had no alternative but to cause purchase orders to be placed with the Factory by MHPEL to keep the operation of MHAL and the Factory viable.

22.  In any event, the discovery by Mr Tse and his people of the involvement of MHPEL led to an incident that occurred at the Factory on 23 or 24 April 2005^[2]. 

23.  It is Mr Tse’s position that given Mr Yeung’s concealed act of engaging the Factory to produce for MHPEL, he wanted to ascertain the position of the Factory’s accounts and stocks. 

24.  Therefore, on the morning of 24 April 2005, upon the instruction of Mr Tse, Mr Tse’s brother brought with him some colleagues of GIL and a number of security guards to visit the Factory.  They wanted to have an on the spot check with the books and records of the Factory, as well as to carry out stocktaking.  They also intended to replace the existing security guards of the Factory with their security guards.  Mr Tse’s brother also required the Factory to stop production for the time being to facilitate the investigation and stocktaking. 

25.  When Mr Tse’s brother and his group arrived at the Factory, Mr Yeung was not there.  They managed to start looking at some of the Factory’s accounting and the stock records.  On the other hand, the security guards originally employed by the Factory refused to leave the Factory, and the two teams of security guard staged a standoff.

26.  Before Mr Tse’s brother and his group of people managed to start any physical stocktaking, Mr Yeung arrived at the Factory in the afternoon.  Mr Yeung was not happy with what had happened and asked Mr Tse’s brother and his group to stop.  Discussions then started between Mr Yeung and Mr Tse’s brother.

27.  Eventually, it was agreed between them that the Factory should first be kept as status quo, while the parties continued to negotiate for a possible resolution or settlement of the dispute concerning the Factory’s production.  They further agreed that:

(1)  The people brought by Mr Tse’s brother should leave the Factory, other than one Mr Ngan, who would be left behind to keep watch of the activities in the Factory over the coming period of time.

(2)  From then onwards, any movement of materials or finished products in and out of the Factory could only be made or effected with the consent of both Mr Yeung and Mr Tse. 

28.  Mr Tse and Mr Yeung then began to negotiate (with the assistance of lawyers) to resolve the dispute between them, while the Factory continued to operate to mainly manufacture MHPEL’s orders.

29.  In May 2005, the parties came to an agreement to settle the dispute.  This led to the signing of the Deed on 21 May 2005, whereby it was agreed that Ms Chan would sell her entire 60% shareholding in MHAL (which held the Factory) to Ms Lee for the price of HK$16,700,00.

30.  The Deed was signed by Ms Chan (as the vendor), Mr Yeung and Mr Tsui on the one hand, and Ms Lee (as the purchaser) and Mr Tse on the other hand.   Ms Chan, Mr Yeung and Mr Tsui together also gave various warranties under the Deed.

31.  The purchase price was to be paid by Ms Lee (as the purchaser) by stages.  As provided in the Deed:

(1)  On the signing of the Deed, Ms Lee should first pay Ms Lee HK$7,600,000. 

(2)  Upon the compliance of the various warranties therein by the Plaintiffs, Ms Lee should further pay Ms Chan HK$7,600,000. 

(3)  Ms Lee shall also pay Ms Chan the remaining HK$1,500,000.  However this is payment is subject to Ms Lee’s right to set-off against any outstanding invoices as identified at clause 3.2.3 of the Deed if they were not settled by the respective customers within 6 months of the Deed. 

32.  After signing the Deed, on 23 May 2005, Mr Yeung and Mr Tse’s brother got together at the Factory to effect the handover of the Factory.  Mr Tsui also resigned from MHAL (and the Factory) on this day.

33.  Ms Lee paid the first HK$7,600,000 when the Deed was signed.  However, she has not paid the second HK$7,600,000 despite repeated demands.

34.  On 22 August 2005, the Plaintiffs brought the present claim against Ms Lee and Mr Tse for this sum of HK$7,600,000.   They however are not pursuing a claim on the HK$1,500,000.

35.  In their Defence and Counterclaim, it is the Defendants’ case that the Plaintiffs were in breach of various warranties provided in the Deed.  As a result, they say the Factory and MHAL have suffered substantial loss and damage, of which the Plaintiffs have agreed to indemnify under the Deed.  Ms Lee and Mr Tse therefore say they should be entitled to set-off the payment of HK$7,600,000 against such loss and damage.

III. The Counterclaim

Some initial observations

36.  As I mentioned above, as the Defendants accept that this HK$7,600,000 should be paid to Ms Chan, but subject to the set-off, this trial is effectively the trial on the counterclaim.

37.  However, as an initial observation it must be noted that under the payment provision of the Deed, it is Ms Lee (as the “Purchaser” defined therein) who is to pay Ms Chan (as the defined “Vendor”) the purchase price.  Therefore, although in the prayers of the Statement of Claim, it is pleaded that Ms Chan claims against the 1^st and 2^nd Defendants (i.e., Ms Lee and Mr Tse) for the sum of HK$7,600,000, I cannot see any basis for such a claim to be made against Mr Tse, as he is not under any liability to pay the purchase price. 

38.  At the same time, the Defendants’ counterclaim is premised on two indemnity clauses in the Deed.  They are as follows:

“10.9.8  The Vendor [i.e., Ms Chan], [Mr Yeung] and [Mr Tsui] jointly and severally undertake with the Purchaser [i.e,. Ms Lee] (for themselves and as trustee and/or agent for [MHAL] and Factory that they will indemnify [MHAL] against the depletion in or reduction in value of the assets of [MHAL] or any increase in its liabilities as a result of or in consequence of any breach of the warranties stated in [the Deed].

10.9.9  Without prejudice to the foregoing provisions of this clause [Ms Chan], [Mr Yeung] and [Mr Tsui] jointly and severally hereby agree to indemnify and keep indemnified [sic] the Purchaser [i.e, Ms Lee] (for itself and as trustee and/or agent for [MHAL]) fully indemnified from and against all claims, demands, actions, damages losses (including but not limited to loss of profit and/or loss of business), costs, obligations, penalties, liabilities, fines and expenses suffered by the Purchaser [Ms Lee] and/or [MHAL] in respect of any breach by [Ms Chan] of any of the warranties or representations contained in [the Deed].  [Ms Chan], [Mr Yeung] and [Mr Tsui] jointly and severally undertake that they will each sign or execute all necessary documents reasonably required by [Ms Lee] and/or [Mr Tse] to effect the sale of the [60% shares in MHAL], transfer of operation of the Factory and bring effect of the undertaking given by each of them under [the Deed].” (emphasis added)

39.  The indemnity given by the Plaintiffs under these two clauses was made in favour of Ms Lee only.  Thus, Mr Tse is not entitled to rely on the indemnity to mount the counterclaim.

40.  Therefore, similarly, I cannot see how Mr Tse could counterclaim (as pleaded) against the Plaintiffs for an indemnity over their breach of the warranties in the Deed.    

41.  For this reason, I will only refer below to the Defendants’ counterclaim as Ms Lee’s counterclaim.

42.  It should further be noted that in this case, unlike what is usually seen in an agreement for the sale and purchase of shares in a company, MHAL (being the subject company the shares in which were agreed to be sold) was not made a party to the Deed.

43.  Moreover, clause 10.9.9 also specifically provides that the indemnity is for the loss and damage suffered by Ms Lee.   Thus, prima facie any loss and damage suffered by MHAL or the Factory but not by Ms Lee personally is not covered by this indemnity.

44.  In this respect, at the end of the trial, it is accepted by counsel for Ms Lee that all the alleged loss and damage claimed in the counterclaim were suffered by either the Factory or MHAL, but not herself.

45.  In the premises, even if Ms Lee could prove that those losses and damage were caused by the Plaintiffs’ breach of the various warranties, the question then arises as to whether they are recoverable by Ms Lee under the indemnity clauses, as they are not losses suffered by her personally.

46.  This is a fundamental question to the counterclaim, as if this is answered in the negative, the counterclaim will fail entirely irrespective of whether the claimed breaches of the warranties and the quantum of loss are proved.  I will therefore deal with this question first, before moving on to discuss the various items under the counterclaim.

Whether Ms Lee could claim on the indemnity clauses

47.  Upon a careful reading of these two clauses, I think Ms Lee could recover as agent for MHAL these losses (if it is established they are caused by the Plaintiffs’ breach of the warranties).  It is so because, on a proper reading and construction:

(1)  Clause 10.9.8 provides expressly that the Plaintiffs are to indemnify Ms Lee as an agent or trustee for MHAL in respect of any depletion or reduction in the value of MHAL’s assets. 

(2)  Given that the Factory is the only asset of MHAL, any loss or damage suffered by the Factory is likely to correspond on a dollar-to-dollar basis to the depletion or reduction in the value of the Factory.  Cf: Johnson v Gore Wood [2002] 2 AC 1 at 62A-B per Lord Millet.

(3)  In the premises, under this clause, Ms Lee as agent for MHAL is entitled to claim against the Plaintiffs for indemnity for any such depletion or reduction in the value of the Factory by reason of any loss or damage suffered directly by the Factory. 

(4)  Clause 10.9.8 also provides that the Plaintiffs are to indemnify Ms Lee as an agent or trustee for MHAL in respect of its increase in liability.  Clause 10.9.9 further provides that Ms Lee is to be indemnified as an agent or trustee of MHAL for all claims, demands, actions, damages losses (including but not limited to loss of profit and/or loss of business), costs, obligations, penalties, liabilities, fines and expenses suffered by MHAL.   As such, in my view, Ms Leeas agent for MHAL is also entitled to claim against the Plaintiffs for an indemnity for any losses and damage suffered by MHAL directly by reason of the Plaintiffs’ breach of warranties.

48.  In the premises, I hold that subject to the proof of the breach of the relevant warranties, causation and quantum in each of the items under the counterclaim, Ms Lee is entitled to claim as agent for MHAL against the Plaintiffs under these two indemnity clauses for the loss and damage which are suffered by the Factory or MHAL.

The various items of counterclaim

49.  At the end of the trial, Ms Lee is only maintaining her counterclaim in relation to seven items.  I will deal with below each of these items on whether Ms Lee succeeds in her counterclaim in proving (a) the breach of the relevant warranty under the Deed, and (b) causation of the loss and its quantum. 

50.  In relation to the witnesses, the Plaintiffs have only called Mr Yeung to give evidence at trial, while Ms Lee has called Mr Tse and Mr Tse’s brother[3].   The witnesses have together given a substantial amount of evidence at trial.  But in my view, not all the evidence is relevant to the counterclaim in its final form, in particular as at the end of the trial, Ms Lee has decided not to pursue a significant part of the counterclaim.

51.  I will deal with their evidence, insofar as it is relevant, when I discuss each of the items of counterclaim below. 

Item 1: Plaintiffs’ failure to provide title documents as warranted under clause 3.2.2 of the Deed

Whether the Plaintiffs were in breach of Clause 3.2.2

52.  Under this item, Ms Lee’s says the Plaintiffs were in breach of the warranty provided under clause 3.2.2 of the Deed.  The clause provides as follows:

“3.2  The Consideration shall be paid by the Purchaser [Ms Lee] to the Vendor [Ms Chan] by the following manner:-

1.   …

2.  a cheque made payable to the Vendor in the sum of HONG KONG DOLLARS SEVEN MILLIONS AND SIX HUNDRED THOUSAND (HK$7,600,000.00).  Such cheque shall be delivered to the Vendor's Solicitors within 30 days and the Vendor's Solicitor shall stakehold the same and only release the same to the Vendor if the Vendor have duly observed and performed the terms and conditions herein (including no breach of any warranty herein) and that the control, management and operation of the Factory are fully taken over by the Purchaser from the Vendor and complete delivery by the Vendor to the Purchaser of all books, records, paper, files, the seals and all other tangible or intangible properties of the Company and Factory including but not limited to (i) title deeds and documents of the land of which the Factory is situated; (ii) 海關關薄 of the Factory; (iii) all original licence and permit and 國土証 of the Factory.” (emphasis added)

53.  Under this clause, Ms Chan (as the Vendor) should deliver to Ms Lee (as the Purchaser), inter alia, all books and records of the Factory, which are expressly provided to include (a) the title deeds and documents of the land of which the Factory was situated, and (b) the “國土証” (“the Land Certificate”) of the Factory. 

54.  It is Ms Lee’s case that the “title deeds and documents” of the Factory’s land also includes the “房地產証” (“the Building Certificate”). 

55.  In relation to this, there is unchallenged evidence from Mr Tse (which I accept) that (a) the Building Certificate would only be issued after the issue of the Land Certificate, and (b) without the Building Certificate, the Factory would be operating on the land lot without all the proper permits.

56.  Ms Lee says Ms Chan was in breach of this clause, as it is common ground that she has not provided to Ms Lee the Land Certificate and the Building Certificate.  As a result of the breach, the Factory had to incur a total sum of RMB 713,058.71 to engage a consultant to apply for them, and to pay all the necessary fees to the relevant authorities.

57.  Despite the above, Mr Kenneth Ho, counsel for the Defendants, submits that Ms Chan was not in breach of clause 3.2.2 because the express reference to the Land Certificate in the clause was a result of common mistake between the parties.  Therefore, Mr Ho further submits, in construing this clause, the Court should ignore this reference to the Land Certificate.

58.  Mr Ho says his submission on the case of common mistake is supported a ledger report (“the Ledger Report”) of the Factory.  The Ledger report shows the accounts of the Factory as at 31 December 2004, whereby various entries were made at its debit column which are described as sums related to various land’s fees.  Mr Ho says that the Ledger Report therefore shows that before the Deed, necessary funds had already been deposited to the Factory’s account for the purpose of paying for the issue of the Land Certificate, and this was known to Mr Tse.  As a result, Mr Ho then says, somehow, it must be a common mistake between the parties to have made a reference to the Land Certificate in clause 3.2.2.

59.  Mr Tse does not accept Mr Ho’s reading as to the meaning the Ledger Report.  He suggests that the entries in it represents only that provisions had been booked for that purpose, but not that money had in fact been deposited to the Factory’s account.

60.  I have no hesitation in rejecting Mr Ho’s above submissions:

(1)  In my judgment, this defence of common mistake is simply not open to the Plaintiffs: 

(a)  It is never pleaded by the Plaintiffs that it was a common mistake between the parties to have inserted in clause 3.2.2 the reference to the Land Certificate.    Throughout the trial before closing submissions, the Plaintiffs have never indicated they would run a case of common mistake.   In my view, the case of the so-called common mistake is nothing but an afterthought raised by the Plaintiffs’ counsel in closing submissions.

(b)  Since such a case is never in issue, understandably nothing was directed on this during examination and cross-examination of witnesses from both side.  Ms Lee is therefore deprived of a chance to rebut the same.

(2)  Further and in any event, the Deed was drafted and vetted with the advice and assistance of lawyers.  It was a product after a process of negotiations between the parties.  Without any clear evidence to show otherwise, I do not find it arguable that the express reference to the Land Certificate in the clause was a result of common mistake.

61.  For the above reasons, I rule that:

(1)  Under clause 3.2.2, Ms Chan has warranted to provide and deliver to Ms Lee the Land Certificate and the Building Certificate (which forms part of the title deeds of the Factory’s land).

(2)  Ms Chan was in breach of this warranty, as she had not delivered and provided to Ms Lee the Land Certificate and Building Certificate.

Causation and quantum

62.  As mentioned above, Ms Lee counterclaims for the sum of RMB 713,058.71, as fees paid by the Factory to the consultant agent and the relevant authorities to obtain the Land Certificate and Building Certificate.

63.  These expenses are supported by the relevant documents showing payments and receipts.  They are not in any way materially challenged by the Defendants in cross-examination.  I accept them as sufficient proof of the cost incurred by the Factory in obtaining the Land Certificate and Building Certificate.

64.  The Plaintiffs however submits that, given the Ledger Report, the Factory has not in fact suffered a loss in this sum, since sufficient funds had already been remitted to the Factory’s account by MHAL well before the Deed was entered into.  The payments made by the Factory for the issue of the Land Certificate were therefore not made from new funds of the Factory deposited after the Deed.

65.  There is nothing in the Plaintiffs’ case:

(1)  None of the witnesses (whether from the Plaintiffs or from the Defendants’ side) have personal knowledge on the preparation of the Ledger Report.  No one could speak to it as to the meaning of the entries, in particular as to whether an entry booked under the “debit” column means that the relevant sums of money were in fact remitted and deposited into the Factory’s bank account (as contended by Ms Chan) or whether it was only a booking made in the ledger to provide for such payments (as argued by Ms Lee).  Without direct evidence on the preparation of the Ledger Report, I find both contentions equally plausible. 

(2)  In the premises, Ms Chan has failed to show to me that Ledger Report is prima facie evidence that money had in fact been deposited to the Factory’s account for the issue of the Land Certificate and Building Certificate. 

(3)  Further, from an email sent by Ms Scarlette Leung to Mr Yeung and Mr Tse on 22 March 2005, Ms Leung asked for the permission from Mr Yeung and Mr Tse to make various payments to the relevant authority for the issue of the Land’s Certificate^[4].   If the relevant and necessary funds had already been remitted to the Factory’s account for the purposes of paying for the Land Certificate as suggested by Ms Chan, I cannot see why Ms Leung would still have to ask for such permission for payment of these funds.  In my view, this email tends to show that as at March 2005, the necessary funds for the payment of the Land Certificate had not been remitted to the Factory’s account for the said use.

(4)  I am not thus satisfied that there is sufficient evidence to show that the payments made to obtain the Land Certificate and the Building Certificate were made from new funds provided by MHAL to the Factory after the Deed.

66.  I am therefore satisfied that the Defendants have proved that, as a result of Ms Chan’s breach of clause 3.2.2, the Factory has incurred a loss of RMB713,058.71 in obtaining the Land Certificate and Building Certificate itself.

Conclusion under item 1

67.  For the above reasons, I conclude that Ms Lee is entitled (as agent of MHAL) to be indemnified by the Plaintiffs the sum of RMB713,058.71.

Items 2 and 3: The Plaintiffs’ failure to provide the after sale service under clause 8 of the Deed

68.  Ms Lee says the Plaintiffs were in breach of clause 8 of the Deed, which provides as follows:

“The Vendor [i.e., Ms Chan], [Mr Yeung], [Mr Tsui] jointly responsible for all after sale service including cost of parts and labour for all existing contracts entered into by [GIL], [MHAL] and the Factory with their respective customers.  Upon expiration of warranty of all such contracts, the Purchaser [i.e, Ms Lee] will within 1 month from receipt of written demand with documentary support contribute half of such costs incurred in relation to such service of Sale Provided always that the Purchaser’s contribution shall in no event be more than HK$100,000.”

69.  There are two items of claim by Ms Lee under this clause.

70.  First, it is Ms Lee’ case that, despite repeated requests made to Mr Yeung, the Plaintiffs had failed to provide after the sale service to various customers of GIL, MHAL and the Factory.  As a result, the Factory has suffered loss and damage in the form of the cost and expenses (which consisted of the labour costs and cost of spare parts) incurred by the Factory to provide these after sale services upon the Plaintiffs’ default to do so.  The total sum incurred is said to be HK$747,851.64.   I will refer to this claim as the “After Sale Service Expenses Claim”.

71.  Secondly, the Defendant says although the Plaintiffs had provided after sale service to a customer known as Topsearch Printed Circuits (Shenzhen) Ltd, given that the after sale service so provided was unable to remedy the problems of the production line experienced by Topsearch, defective products were continued to be produced by this production line until early 2006^[5].   The Factory therefore has suffered a loss in the total sum of RMB322,612 as the compensations made to Topsearch for these defective products.  I will refer to this item of clam as “the Defective Products Compensations”.

The Plaintiffs’ preliminary point of objection

72.  Mr Ho for the Defendants in his closing submits that on a proper construction of clause 8, Ms Lee has to first issue a written demand to the Plaintiffs with the necessary supporting documents when she seeks to claim against the Plaintiff for the expenses incurred in providing the after sale service.  Mr Ho says, since clause 8 requires expressly the Plaintiffs to provide Ms Lee a written demand with supporting documents to claim contribution (up to HK$100,000) for costs incurred in providing the after sale service, it must therefore also be implied in the clause that Ms Lee would have to do the same when she wants to claim against the Plaintiffs for such expenses.

73.  I am unable to accept these submissions:

(1)  Again, the case of an implied term is never part of the Plaintiffs’ pleaded case.  They are not entitled to raise it. 

(2)  Further, In any event, it is trite that a term would only be implied into an agreement by obvious implication to reflect the intention of the parties, necessity to provide efficacy to the agreement or as a matter of law.  See:  Chitty on Contracts (29^th ed), paras 13-003 – 13-008).

(3)  Without a proper plea, there is no indication as to the basis on which the Plaintiffs say why such a term should be so implied. Mr Ho has also made no submissions as to on which of these bases the implied term should be implied. 

(4)  None of these established grounds for implying a term has been established in the present case. 

(5)  I therefore have no hesitation to reject Mr Ho’s submissions.

74.  Having disposed of the Plaintiffs’ preliminary objection to the Defendants’ counterclaim under these two head, I would now move on to discuss the individual heads of this counterclaim as follows.

The After Sale Service Expenses Claim

Whether the Plaintiffs were in breach of Clause 8

75.  In relation to the After Sales Service Expenses Claim, it is common ground that the Plaintiff had not provided the after sale service to those customers covered by the counterclaim.  It is not challenged by the Plaintiffs that the services had instead been provided by the Factory itself.  

76.  Thus, prima facie, the Plaintiffs were in breach of Clause 8 in failing to provide the said after sale service.

77.  However, the Plaintiffs contend that there was no breach because the Defendants had not asked the Plaintiffs to provide such after sale services.  Mr Yeung gives evidence in support of this allegation.  He confirms that he had never received any calls or notification from anyone to provide after sale services to these customers.  Mr Yeung also says as far as he could see, the reason why the Defendant had not asked him to provide the after sale service to these customers was because they were worried that Mr Yeung would entice those customers away for MHPEL. 

78.  On the other hand, Mr Tse’s brother, who was responsible for GIL’s marketing, gives evidence and confirms that he and his subordinates had called Mr Yeung on various and numerous occasions to ask him to provide after sale service to those customers.  However, Mr Yeung usually said he and his people were too busy, and would provide the services later, which was never materialized.

79.  In this respect, I prefer the evidence of Mr Tse’s brother to Mr Yeung’s.  My reasons are as follows:

(1)  It is uncontroversial that when the Deed was signed, (a) the Defendants were fully aware of the existence of MHPEL and the fact that MPHEPL had been obtaining purchase orders from Viasystem, a customer of GIL/MHAL, and (b) Mr Yeung and Mr Tsui were fully away of the identity of GIL and MHAL’s customers, as the Factory had been manufacturing their purchase orders placed through GIL.

(2)  In these circumstances, I find it inherently unlikely that:

(a)  After extracting an express warranty under clause 8 from the Plaintiffs to provide after sale services to the existing customers, the Defendants would have however avoided asking the Plaintiffs to provide the services to these very customers, for the alleged worry that the Plaintiffs would “steal” the customers away.  It must be noted that the Defendants already knew before the Deed of the fact that the Plaintiffs were running a competitive business, but the Defendants still wanted clause 8, which was agreed by the Plaintiffs.

(b)  The Defendants were so worry that the Plaintiffs would entice away these customers from the Factory or GIL, they had decided not to ask the Plaintiffs to provide the after sale services to them.  Given the above common background, there is nothing to prevent the Plaintiffs from directly approaching these customers even without providing the after services.  In other words, it would not practically prevent the Plaintiffs from enticing the customers away (if they had wanted to do so), by not asking the Plaintiffs to provide the after sale services.

(3)  Further, Mr Yeung under cross-examination accepts that soon after the Deed, he and his new factory were very busy in trying to cope with their own purchase orders.  The new factory was also short of workers for a period of time until early 2006 to meet their own production demands. 

(4)  This evidence is supportive of, and consistent with, the evidence of Mr Tse’s brother that, when they approached Mr Yeung for the provision of after sale services, Mr Yeung usually said he was busy and would provide the same later.  

80.  In the premises, on this issue, I accept the evidence of Mr Tse’s brother and reject that of Mr Yeung.  I conclude that the Plaintiffs had failed to provide the after sale services to the various customers despite repeated demands from Mr Tse’s brothers and his subordinates.    The Plaintiffs were therefore in breach of clause 8 under the After Sale Service Expenses Claim.

Causation and quantum

81.  Ms Lee claims for an indemnity for the sum of HK$747,851.64.  This is said to be the sum total of (a) HK$593,310 as labour cost, and (b) HK$154,541.64 as spare parts charges, incurred in the provision of the after sale services.

82.  The Plaintiffs have not in any way materially challenged the HK$154,541.64 as the cost of spare parts used to provide the after sale services.  I am satisfied that this quantum is proved.

83.  In relation to the labour cost of HK$593,310, Ms Lee says it is calculated by multiplying the estimated hourly rate of labour cost in the sum of HK$60 with the actual hours of work spent by the engineers and technicians in providing the after sale services^[6]. 

84.  Mr Tse and Mr Tse’s brother both give evidence to say that this average unit rate of HK$60 was worked out by the accounting staff by reference to (a) the monthly salary of the specific engineer, technician or worker who had provided the after sale service, (b) the travelling and accommodation (if any) expenses of the engineers and technicians in providing the services to the customers, (c) their meal allowances, and (d) the cost incurred by the logistical support provided by the back-office stationed in Hong Kong, which included a manager and his assistance. 

85.  However, both Mr Tse and Mr Tse’s brother were not personally involved in the computation of this unit rate.  Mr Tse says the figure was provided to him by the accounting staff.  He and Mr Tse’s brother simply do not know the exact basis on which the accounting staff had come to this hourly rate.   Mr Tse further fairly accepts in cross-examination that this hourly rate could well be an over-estimate.   In answering my question, Mr Tse also confirms that there are underlying records and documents which would support the actual amount of the travelling, meals and accommodation expenses incurred by the engineers and technicians, but they are not produced for the purpose this trial.

86.  Given the above state of the evidence and Mr Tse’s frank acceptance that the hourly rate could be over-estimated, I am not satisfied that Ms Lee has proved on the balance of probabilities that the labour hourly rate of HK$60 is an accurate or reliable one.  

87.  Mr Dawes for the Defendants in his closing submissions says even if the Court is not satisfied with the proof of the HK$60 hourly rate, given that there is evidence of the salary rate of the technicians and engineers, and that it cannot be disputed that some costs other than the salary payments must have been incurred in providing the after sale service, the Court is entitled to make a “slight” deduction of the HK$60 hourly rate estimate to come to a view on the proper quantum of loss under this head.

88.  I do not accept Mr Dawes’ submissions.  The burden rests on the claimant to prove quantum.  Although the Court may at times make its own assessment which is different from both the claimant and defendant’s respective case, that assessment must still be premised upon accepted and quality evidence.

89.  In this case, there is simply no evidential basis on which the Court could pitch the level of the deduction that should be made against the HK$60 hourly rate as submitted by Mr Dawes.  The lack of basis for the Court to properly make a deduction is underlined by Mr Dawes’ inability to suggest what level of deduction he says is appropriate on the basis of the evidence. 

90.  Mr Dawes has also not provided the Court with the submissions on what is the total salary cost of the engineers and technicians who had provided the after sale services, if that can ever be worked out from the mass of the evidence spread out in the hearing bundles.  It is not for the Court to work it out for Ms Lee.  The Plaintiffs would also be unfairly deprived of a chance to respond to such a calculation, if any, if this is not properly put forward in the evidence or closing submissions by Ms Lee. 

91.  In the premises:

(1)  Ms Lee has proved that HK$154,541.64 as spare parts charges were incurred in the provision of the after sale services; but,

(2)  Ms Lee has failed to prove that labour cost of HK$593,310 was incurred for the provision of the after sale services.

The Defective Products Compensations Claim

Whether the Plaintiffs were in breach of clause 8

92.  As I mentioned above, the Plaintiffs did provide after sale service to Topsearch as required under clause 8.

93.  Ms Lee says because of the after sale service so provided was unsatisfactory and did not remedy the problems of Topsearch’s production line, the Factory had to pay compensations to Topsearch for the defective products produced by the production line between June 2005 and January 2006.  The compensations are in the total sum of RMB322,612. 

94.  Various debit notes issued by Topsearch to MHAL support that such compensations were made by MHAL.  The compensations were recorded in these debit notes as set off against outstanding payments owed by Topsearch to MHAL. 

95.  These debit notes were countersigned by Mr Yeung. 

96.  As I understand it, Ms Lee’s case (which is supported by the evidence of Mr Tse’s brother) is that these debit notes were countersigned by Mr Yeung because Mr Yeung was asked to confirm that these compensations were made because the after sale service was provided by Mr Yeung under the Deed.

97.  Mr Yeung denies that the services provided were of unsatisfactory standard.  He says the problems of Topsearch production line were due to the original design fault of the motor system, which could only be fully remedied when the motor was replaced eventually in early 2006.  This has nothing to do with the quality of the after sale service provided.

98.  Mr Yeung further says that he signed those debit notes because he was asked to confirm that those set-off sums could be regarded as un-recovered payments of Topsearch’s debit notes as identified at Clause 3.2.3 of the Deed, so that Ms Lee was entitled to deduct these sums from the HK$1,500,000 as provided under the clause.

99.  Clause 3.2.3 provides as follows:

“3.  The balance of HONG KONG DOLLARS ONE MILLION FIVE HUNDRED THOUSAND (HK$1,500,000.00) shall be deposited into an account of Messrs. George Tung, Jimmy Ng & Valent Tse and be released to the Vendor upon full receipt of the payment by the Company and/or Gainford International Limited in respect of the following invoice without any deduction whatsoever: -.

	COMPANY NAME		MHAL - SALE INVOICE
1)	華北計算技術研究有限公司		SI-MAA40660
2)	TECHWISE CIRCUITS COMPANY LTD		SI-MAA20369, SI-MAA20400, SI-MAA30117
3)	TOPSEARCH PRINTED CRICUITS (SHEN ZHEN) LTD		SI-MAA40443, SI-MAA40467, SI-MAA50012, SI-MAA50037, SI-MAA40637, SI-MAA40010, SI-MAA40617, SI-MAA50010,
4)	VIASYSTEMS KALEX PRINTED CIRCUIT BOARD LTD		SI-MAA40424, SI-MAA40468, SI-MAA40512, SI-MAA40567, SI-MAA50025, SI-MAA50026
5)	SHEN ZHEN ENDA ELECTRONICS CO LTD		SI-MAA40158, SI-MAA40332, SI-MAA40031
6)	深圳丹邦科技有限公司		SI-MAA40131, SI-MAA40132, SI-MAA40134, SI-MAA40135, SI-MAA40171, SI-MAA40195
7)	建富科技實業公司		SI-MAA40224, SI-MAA40281, SI-MAA40282

In the event that the Company and/or Gainford International Limited is unable to receive full payment of the above invoice within six (6) months from the date of this agreement by whatever reason, the Purchaser is entitled to deduct any outstanding payment from this said sum of HK$1.5 millions and pay the balance to the Vendor in full discharge of her liability in respect of the said whole sum of HK$1.5 millions.  For the avoidance of doubt the Purchaser shall not be required to pay the Vendor any further sum or sums even if any subsequent payment is received by the Company or Gainford International Limited in respect the said invoice after the said 12 months period.”

100.  After assessing the evidence as a whole, I accept Mr Yeung’s evidence:

(1)  All of Topsearch debit notes (including those issued for the months before the Deed) for deducting compensations against the outstanding invoices were signed by Mr Yeung on 2 June 2006.^[7] 

(2)  This means that he was also confirming the compensations paid to Topsearch for the period before the signing of the Deed, when the after sale service was not provided pursuant to the Deed.

(3)  This is inconsistent with Ms Lee’s case that Mr Yeung signed the debit notes because the after sale service was provided by him under the Deed, and that the service provided was not good enough to rectify the problems experienced by Topsearch.

(4)  On the other hand, this is more consistent with Mr Yeung’s case that he was asked to confirm these payments to Topsearch  (which were made by off-setting against Topsearch’s outstanding payments under MHAL’s invoices) to signify his agreement that the Defendants were entitled to deduct this sum against the HK$1,500,000 as provided under clause 3.2.3 of the Deed.

101.  Mr Dawes for the Defendants in his closing submits that Mr Yeung’s evidence should not be accepted, because the evidence shows the he did not sign on the documents issued by San Yat Technology Ltd in relation to the compensations paid by GIL.  He says as it is the Plaintiffs’ own case that San Tat is the same company known as Shen Zhen Enda Electronics Co Ltd as identified under clause 3.2.3. Therefore, the fact that Mr Yeung were not asked to countersign these documents is contrary to Mr Yeung’s case that he was required to countersign to confirm that the compensations paid could be deducted against the HK$1,500,000 as un-recovered sums of the identified invoices.

102.  To support his submissions, Mr Dawes by way of an example identifies a document dated 8 March 2006 signed by Yan Tat and GIL, where the parties confirmed the payment of the compensation by GIL.

103.  With respect, I do not accept Mr Dawes’ submissions:

(1)  Unlike the debit notes issued by Topsearch, the documents issued by Yan Tat do not suggest that the compensations paid to it was to be effected through deduction of outstanding sums owed by it to GIL.  As such, there is no question of the Defendants’ entitlement to deduction against the HK$1,500,000 under clause 3.2.3 of the Deed.

(2)  Further, under clause 3.2.3, Ms Lee is entitled to seek set-off against the HK$1,500,000 with those invoices which were not settled within 6 months of the Deed.  Yan Tat’s document as identified is dated after this 6 months period.   At the same time, there is no evidence to show whether by the time of this document, Yan Tat (assuming it is the same as Enda) had not settled all the invoices as identified under clause 3.2.3.  In the premises, the fact that the Yan Tat document was not countersigned by Mr Yeung is not inconsistent with Mr Yeung’s case, since it is equally possible that Yan Tat had by then settled the outstanding invoices (as identified in clause 3.2.3) and there was therefore no question of a right to set-off these compensations with the HK$1,500,000. 

(3)  Moreover, it is also important to note that all the invoices identified under clause 3.2.3 for different customers were stated to be MHAL’s invoices (presumably they were therefore issued by MHAL), while the payment confirmation issued by Yan Tat was made to GIL (not MHAL) and compensation was to be paid by GIL (not MHAL).  As such, and without more, I am not satisfied that there is even a prima facie case that Ms Lee could legitimately invoke her entitlement of set-off against the HK$1,500,000 under clause 3.2.3 in relation to the compensation paid by GIL to Yan Tat.

(4)  In any event, Ms Lee does not accept at trial that Yan Tat is the same as Enda as identified under clause 3.2.3.  It must therefore also be assumed that the Defendants all along have not recognized or regarded Yan Tat as the same as Enda.   In that case, there is obviously no reason why the Defendants would have asked Mr Yeung to sign the compensation documents issued by Yan Tat. To the Defendants, they would be irrelevant (because they do not relate to Enda) to the set-off entitlements under clause 3.2.3.  

(5)  For these reasons, the fact that the Yan Tat’s compensation documents were not countersigned by Mr Yeung is not contrary to or inconsistent with Mr Yeung’s case as to why he countersigned the Topsearch debit notes.

104.  In the premises, I am not satisfied that Ms Lee has established on the balance of probabilities that the Plaintiffs were in breach of clause 8 in providing a substandard after sale service to Topsearch.

Causation and quantum

105.  If I were wrong above on the Plaintiffs’ breach of Clause 8 under this item of claim, for the following reasons, I would still have concluded that the Defendants have failed to prove causation and quantum.

106.  These sums of compensation are supported by the relevant debit notes issued by Topsearch to set-off its outstanding payments for various invoices owed to MHAL.

107.  Although I accept that these debit notes prove the quantum of the compensation paid to Topsearch, I am not satisfied that they amount to the proof of the quantum of MHAL’s loss suffered as a result of the Plaintiffs’ breach of the clause 8.  This is so because:

(1)  It is Mr Tse’s evidence that even in the ordinary course of events, as the production line manufactured by the Factory for a particular customer would require a period of fine tuning and settlement after installation, defective products would be unavoidably produced by the production line until the fine tuning and settlement have been achieved.  These problems would not and could not be solved by way of the after sales service for such a period.  As a result, the Factory, MHAL or GIL have been paying certain compensations to the customers for the defective products produced during this fine tuning period in the ordinary course of business.

(2)  In other words, certain compensations would usually and generally have to be paid to a customer for defective products after a newly tailored made production line has been delivered, which has nothing to do with the quality of the after sale service. 

(3)  In answering the court’s question, Mr Tse again fairly accepts that in calculating the quantum of loss under this counterclaim, the Defendants have not taken into account the said usual rate or quantum of compensation paid to a customer. 

(4)  In other words, Ms Lee’s claim for an indemnity of the compensations paid for the defective products has included in it the amount of compensations that would have been needed to be paid to the customer in any event even if proper after sale service had been provided.

(5)  Thus, in relation to the claim for Topsearch, the sum of RMB322,612 now pursued by the Defendants has included the amount of compensations that would in any event have to be paid to Topsearch even if no substandard after sale service (as alleged by the Defendants) had been provided.  This is supported by the fact that MHAL had in fact been paying compensations to Topsearch in the few months before the Deed was signed^[8].  

(6)  However, in the present case, there is no evidence to enable the Court to distinguish in Ms Lee’s present counterclaim as to which proportion of it constitutes compensations that have to be paid in any event and have nothing to do with the alleged Plaintiffs’ poor after sale service. 

(7)  As such, in my judgment Ms Lee has failed to prove the quantum of loss which was caused by the Plaintiffs’ breach of clause 8. 

108.  For these reasons, Ms Lee has not satisfied me that RMB322,612 represents the proper quantum of loss suffered by MHAL under the Compensation Claim.

Conclusion under Items 3 and 4

109.  Under these two items of claim, I therefore conclude that the Plaintiffs are liable to indemnify Ms Lee as agent of MHAL for the sum of HK$154,541.64 only.

Item 4: Payment made to the employees of the Factory

110.  After the handover of the Factory following the signing of the Deed, the Defendants terminated the employments of the security guards and some of the then workers of the Factory.  There were also other workers who had then resigned from work on their own in the following one or two months.

111.  In seeking to terminate the employments, the Defendants say they had discovered that (a) the workers had in fact not been paid their April and May salaries, and (b) further compensations had to be made to these workers under the relevant labour law and regulations in the Mainland.

112.  As a result, the Factory had paid the following sums to its employees after the Deed:

(1)  RMB59,274 as money paid to the security guards when they were sacked by the Factory, which included the outstanding April and May salaries as well as further compensations required by the law.

(2)  RMB33,977 paid to the workers sacked by the Factory, which included the April and May salaries, as well as further compensations required by the law.

(3)  RMB84,959 as April and May salaries paid to workers resigning on their own.

(4)  RMB372,538 as the outstanding April and May salaries paid to the workers and clerical staff, who had stayed on to work for the Factory.

113.  Ms Lee now says that under clause 10.9.2 of the Deed, the Plaintiffs have warranted that the Defendants are not required to make any payment when terminating the workers/employees immediately after the signing of the Deed.  As all the above payments were required to be paid by the Factory to the employees, the Plaintiffs were in breach of the warranty, and Ms Chan should be liable to indemnify Ms Lee.

114.  Clause 10.9.2 of the Deed provides as follows:

“There are no existing service agreements or contracts between the Factory and any directors or executives or employees thereof which cannot be terminated immediately without any long service payment or any other payment.”

Any breach of clause 10.9.2

115.  The Plaintiffs do not dispute that the above payments (and the quantum) were made by the Factory to the workers or employees of the Factory.

116.  They however say that on a proper construction of clause 10.9.2:

(1)  Given the use of the word “terminated” and its ordinary meaning, the clause only applies to those employees who are “sacked” by the Factory immediately after the Deed, as their service agreements are “terminated” by the employer. The clause therefore does not cover normal salary payments or payments made to employees who resign voluntarily.

(2)  The term “any other payment” also does not cover any payments required to be paid by the law to departing staff whose employments have been terminated by the Defendants.  This is so because although the meaning of the term “any other payment” could be very broad, it should not “supersede” the law.

117.  I accept the submissions that the word “terminated” ordinarily understood in the context of employment should only cover those employees of the Factory who were sacked by the new management after the Deed.  In my view, the word “terminated” used in the context of employment is ordinarily understood to refer to the circumstances where the employment is terminated by the employer.  When the employee himself decides to leave, it is in my view rare to say that the employee has terminated his employment, or that his employment is terminated by himself.  In such a case, it is usually referred to as the employee’s resignation or that the employee has resigned from work. 

118.  I therefore conclude that payments made to the workers of the Factory who had resigned on their own, and those who have decided to stay on with the Factory are not covered by the warranty provided under clause 10.9.2.

119.  I however reject the Plaintiffs’ second submission.  There is nothing to objectively indicate in the clause that payments made under the law should be excluded from the ambit of the term “any other payment”.  In fact the reference in this clause to “long service payment” shows that even payment required by the law to be made is covered by the clause.  In my judgment, the Plaintiffs’ submission is inconsistent with the express and clear words of the clause, and cannot be accepted.

120.  I therefore hold that the compensations paid to the security guards and workers when their employments were terminated by the Factory also fall within the warranty provided under clause 10.9.2.

121.  The Plaintiffs further submit that it could not have been the objective intention of the parties to cover in the warranty any outstanding salary payments. They say this is so because before the Deed, the parties knew that there were these outstanding salary payments, and therefore it would have been objectively absurd for the Plaintiffs to have agreed to such a warranty if it covered these unpaid salaries.

122.  The Defendants deny that they knew about the outstanding salary payments. 

123.  In my view, even if the Defendants knew[9] about these outstanding salary payments, this does not lead to the above conclusion as contended by the Plaintiffs:

(1)  It is common ground that the purchase price of the Ms Chan’s 60% shareholding in MHAL was agreed between the parties after they had themselves taken into account what they regarded as the liability (which should include the liability for the unpaid salaries) and worth of MHAL and the Factory at that time.

(2)  In the premises, with the agreed purchase price of HK$17,600,000, there is nothing which has been shown to me to demonstrate that it is objectively and unreasonably absurd (as submitted by the Plaintiffs) for the parties to have agreed to this warranty which covers these unpaid salaries.  It must be noted that this clause is only limited to those employments that would be, and are in fact, terminated by the Defendants after the Deed. 

(3)  The parties were advised by lawyers in agreeing to the terms of the Deed. If they had intended this clause not to cover the unpaid salaries, this could and should have been done expressly.

124.  I therefore reject also the Plaintiffs’ said construction of clause 10.9.2. 

125.  For the above reasons, I am satisfied that there is a breach by the Plaintiffs of clause 10.9.2 when the Factory was required to pay a total sum of RMB93,251 to the employees sacked by it.

Causation and quantum

126.  It is obvious that the breach of clause 10.9.2 held above has caused the Factory the loss of RMB93,251.  As I have mentioned above, the Plaintiffs have not in any material aspects disputed the quantum of these payments.

127.  Causation and the quantum of RMB93,251 are therefore proved by the Defendants.

Conclusion under Item 4

128.  Ms Lee as an agent of MHAL is entitled to claim against the Plaintiffs for RMB93,251 by reason of their breach of clause 10.9.2.

Item 5: Shortage of tax free raw materials

129.  It is common ground that under the relevant PRC regulations, the Factory could only purchase and import tax-free raw materials to manufacture finished products or machineries for export purposes.  The relevant authority, when approving each of the Factory’s applications, would also determine the quantity of tax-free raw materials that could be so imported.  

130.  It is also common ground that it is necessary for the Factory to keep records of the imported tax-free materials and the respective quantity of such materials that have been used in the exported products, in works in progress (“WIP”) and kept in stock.  These figures should tally with each other.  The records are kept in a book called the custom and excise book (海關關簿) (“the C&E Book”).

131.  Ms Lee says that, after the handover of the Factory, and after proper stocktaking, it was discovered that the quantity of the tax-free materials in the stock (which included those in WIP and exported products) did not tally with the balance as recorded in the C&E Book. 

132.  It is Ms Lee’s case that if the customs and excise authority of the Mainland found out about this discrepancy during their routine and spot checks, in addition to the penalty of a fine, the Factory would also risk the possibility of being suspended or closed down from operation.

133.  As a result, in order to avoid being fined and closed down by the authority, the Factory had purchased RMB1,077,555.09 worth of raw materials from the market so as to make up the difference between the records and the actual position of the stock of tax-free raw materials.

134.  It is Ms Lee’s case that by way of clause 10.9.3 of the Deed, the Plaintiffs had warranted that there were no circumstances which might lead to suspension and cancellation of any permits to enable the Factory to continue to operate lawfully and without hindrance.  The shortage of the tax-free raw materials amounted to such a circumstance, which might lead to the suspension and cancellation of the permits to allow the Factory to operate lawfully.  Therefore, the Plaintiffs were in breach of the warranty

135.  The clause provides as follows:

“The Factory has all permits, authorities, licences, consents (whether granted by public or private authority) necessary whether under the laws of the People’s Republic of China, the Laws of Hong Kong or otherwise to carry on its business effectively lawfully and without hindrance in the manner and in the place in which the business is now being carried on with particular reference to the ownership of the Factory and there are no circumstances which may lead to suspension and cancellation of any such permits.”  (emphasis added)

136.  Ms Lee therefore says the Factory has suffered a loss of RMB1,077,555.09 as a result of the Plaintiffs’ breach of clause 10.9.3. 

137.  The Plaintiffs do not in fact dispute that there was a shortfall of tax-free raw materials as suggested by Ms Lee.   

138.  Moreover, under cross-examination, Mr Yeung accepts that:

(4)  The Factory and the legal representative would be in breach of the relevant regulations if there is a discrepancy between the balance in the amount of tax-free raw materials in the C&E Book and the actual quantity in stock.

(5)  If it is discovered by the relevant authorities that there is a shortfall in the tax-free materials, the Factory is liable to a fine which can be in the region of 30% of the original duties.

(6)  Although it does not occur frequently, the authorities have the power to close down the Factory by reason of the shortfall in the tax-free raw materials.

(7)  The production of the Factory could therefore be hindered as a result of the shortfall.

(8)  The way to resolve the matter is to replenish the tax-free materials as soon as possible and before it is discovered by the relevant authorities.  

139.  However, it is Mr Yeung’s evidence in chief that since the commencement of the operation of the Factory, there had always been a discrepancy between the record of tax-free raw materials in the C&E Book and the actual quantity in the stock, and that Mr Tse was all along aware of that.

140.  In their closing submissions, the Plaintiffs therefore submit that there was no breach of clause 10.9.3 because:

(1)  Clause 10.9.3 is only a warranty that the Factory had all the necessary permits, authorities, licences and consents to carry on its business effectively lawfully and without hindrance “in the manner and in the place in which the business” was at the time of the Deed being carried out.

(2)  The manner in which the Factory was operating at the time when the Deed was signed (and as had been always the case) was that there was always a shortfall of tax-free raw materials (as supported by Mr Yeung’s evidence).

(3)  In the premises, the shortfall and discrepancy of tax-free raw materials between the balances as recorded in the C&E Book and the actual stock did not affect or hinder the manner in which the Factory was operating at the time of the Deed.

141.  I do not accept the Plaintiffs’ submissions.  My reasons are as follows:

(1)  I agree with Mr Dawes’ submission that it is not open to the Plaintiffs to run such an argument because:

(a)  This is not part of their pleaded case.  As confirmed by Mr Ho for the Plaintiffs at the start of the trial, the Plaintiffs’ case in their defence to the counterclaim was to hold the Defendants to strict proof.  There is no positive case advanced by the Plaintiffs other than the general averment that they were not in breach of the various clauses of the Deed[10]. 

(b)  Mr Yeung’s said evidence in support of this argument is not contained in any of this witness statements, and the same is never put to Mr Tse or Mr Tse’s brother under cross examination.  The Defendants are therefore deprived of an opportunity to respond to and rebut this evidence.

(2)  In any event, this is argument is no answer to Ms Lee’s case that there is a breach of this warranty as the shortfall in tax-free raw materials did pose a circumstance that might lead to the suspension and cancellation of permits to allow the Factory to operate[11].  It must be remembered that under clause 10.9.3, there is a warranty that there are “no circumstances which may lead to the suspension and cancellation of any such permits”.

142.  In the circumstances, I am satisfied that the Defendants have proved that the Plaintiffs were in breach of the warranty under clause 10.9.3.

Causation and quantum

143.  The Plaintiffs have not put forward any material evidence to challenge the evidence on the quantity of the shortfall in tax-free raw materials, and the quantity and value of the raw materials purchased by the Factory to replenish the shortfall.

144.  Mr Ho in his closing submissions also raises no challenge to these aspects of the Defendants’ case.

145.  In the circumstances, I find it proved to my satisfaction that the Factory has suffered a loss in the sum of RMB1,077,555.09 by reason of the Plaintiffs’ breach of clause 10.9.3.

Conclusion under Item 5

146.  For the above reasons, I conclude that the Plaintiffs are liable to indemnify Ms Lee as agent for MHAL for the sum of RMB1,077,555.09.

Item 6: Shortage of raw materials

Whether there is a breach of the warranty

147.  By way of clause 10.9.7 of the Deed, the Plaintiffs give a warranty that the value of the raw materials kept by the Factory is not less than HK$3,700,000.  The clause provides as follows:

“The raw materials of the Factory is no less than Hong Kong Dollar Three Millions and Seven Hundred Thousand (HK$3,700,000).”

148.  The Defendants’ evidence is that, upon stocktaking carried out after the handover of the Factory, the total value of the raw materials identified in the main storage was only HK$2,650,568.32, while the book value of the raw materials stored in the non-flowing storage (不流動倉) is HK$868,813.38 (as supported by the stock records dated 24 May 2005)[12].

149.  Ms Lee’s case under this item of claim runs as follows:

(1)  First, even taking into account of all the stocks of raw materials under the main storage and the non-flowing storage, the total book value of them is only HK$3,531,735.68 (i.e., HK$2,650,568.32 + HK$868,813.38), which is still HK$168,264.14 short of the warranted amount of HK$3,700,000 under clause 10.9.7.  As such, the Plaintiffs are in breach of the warranty and are at least liable to reimburse Ms Lee this sum under the indemnity clauses.

(2)  Secondly, a total value of HK$924,493.89 of raw materials should also be discounted for the following reasons:

(a)   These are raw materials kept in the storage (including those stored in the non-flowing storage and the main storage) which are obsolete, defective, and/or out of date.  They  are therefore no longer of any use to the Factory and should be discounted from calculating the value of the Factory’s raw materials;

(b)  In any event, as confirmed by Mr Yeung under cross-examination, (a) raw materials would only be moved to and stored in the non-flowing storage after they had not be made use of for more than 720 days, and (b) for accounting purposes, provisions (which are equivalent to the book values of the raw materials) have also been made in the Factory’s accounts for the materials in the non-flowing storage in the balance sheet.   In the premises, their value should not be taken into account to calculate the value of the Factory’s raw materials. 

(3)  As a result, if discounting the said value ofHK$924,493.89, there is a shortfall of HK$1,092,758.03 in the value of the raw materials when compared with the warranted amount of HK$3,700,000.

(4)  However, the Defendants are prepared to give credit of HK$12,000 to this shortfall sum, since this is the highest estimated scrap value provided by the scrap collectors on approximately half of the obsolete materials identified above by the Defendants. 

(5)  The shortfall as claimed should thus be HK$1,080,758.03.

The shortfall of at least HK$168,264.14

150.  The Plaintiffs contend that in calculating the value of the stock of raw materials of the Factory, raw materials being taken out from the storage and engaged in the work-in-progress (“WIP”) should also be taken into account.  According to the Plaintiffs, if WIP raw material values had been so taken into account, the total value of the raw materials in the Factory at the time of the Deed should be more than HK$3,700,000.

151.  For this contention, it is Mr Yeung’s evidence that two categories of WIP raw materials should be regarded as and counted towards the raw materials of the Factory. 

152.  First, those that were still sitting in the production area of the Factory and not yet been used in the production process should be counted towards the value of raw materials of the Factory. 

153.  Secondly, for the raw materials that had already been used in production process of the machineries but before final completion, if they could still be theoretically removed from the WIP semi-finished products in their original forms (such as bolts and screws), they should also be taken into account for the valuation of the total amount of the Factory’s raw materials.  Mr Yeung however accepts that for those raw materials which could no longer be theoretically removed in their original state (such as cut metal pipes, electric wires etc), they should not be counted towards such valuation.

154.  I reject the Plaintiffs’ contention and Mr Yeung’s above evidence as to the calculation of the value of raw materials maintained by the Factory.  My reasons are as follows:

(1)  To me, I find it against ordinary common and commercial sense to say that the stock of raw materials maintained by a factory would include those materials which have already been taken out and engaged in the production process.  In my view, the ordinary meaning of the term “raw materials” refers to those which have not been engaged in any production process, that is why they are called “raw” materials.

(2)  Further, I have difficulty to see and understand how stocktaking of the raw materials could be properly done practically at any one time, if this were to include (as suggested by the Plaintiffs) also the raw materials that are being used in WIPs.  It could not have been suggested that the stock-taker would need to look at each of the WIP components and parts to try to work out which parts of the “raw materials” already used in them could be theoretically taken out in their original forms, and which could not.  This impracticability of properly conducting stocktaking of the raw materials points strongly against the suggestion that the valuation of the raw materials of the Factory should include those that are being used in the WIPs.

(3)  I also accept the submissions made for Ms Lee that, although the Factory maintained a record of the total WIP materials, there is no record of what WIP materials were already used to manufacture machineries and those which were still sitting in the production line.  As such, it is impossible or impracticable to accurately calculate the available raw materials in the WIP process which have not been used yet.

155.  I therefore accept Ms Lee’s case and conclude that the Plaintiffs were in breach of clause 10.9.3 as the value of the raw materials of the Factory were at the time of the Deed below the warranted figure of HK$3,700,000 by HK$168,264.14.

The shortfall of HK$1,080,758.03

156.  I however reject Ms Lee’s case that there was a shortfall of HK$1,080,758.03 in the value of the raw materials when compared with the warranted figure.

157.  The evidence in relation to the proof and rebuttal of the obsolete nature of the raw materials of a value of HK$924,493.89 can be summarized as follows:

(1)  At paragraph 17(b) of Mr Tse’s witness statement, he said that these raw materials were “damaged, obsolete, used and/or of low value”.

(2)  At paragraph 38(b) of Mr Tse’s witness supplemental statement, Mr Tse further explained that these identified raw materials were “rusted, destroyed, broken, old and/or in poor conditions” and therefore they were useless and obsolete.  Photographs taken of certain portion of these raw materials were exhibited to the witness statement. 

(3)  In the middle of the trial, it is revealed in Mr Tse’s oral evidence that about half of these identified obsolete raw materials are still being kept by the Factory in its storage, while the other half had already been disposed of previously by selling them to scrap materials collectors.

(4)  On the Plaintiffs’ application, and with the leave of Court, Mr Yeung for the Plaintiffs attended the Factory with some other technicians to inspect this remaining portion of the alleged obsolete raw materials over a weekend in the middle of the trial.  Mr Yeung then produces a further witness statement with various photographs taken of these raw materials.  It is Mr Yeung’s evidence that most if not all of these raw materials are new and useful. Some of them are still even in their original packing.

(5)  Mr Tse in reply makes his 2^nd supplemental witness statement, in which he tries to point out and identify the various problems of these raw materials.  These identified problems have been summarized in a table attached to his statement.

(6)  Both Mr Tse and Mr Yeung in their respective oral evidence confirm what they have said in these statements.

158.  After looking at and evaluating the evidence as a whole, I am not satisfied that it has been shown on the balance of probabilities that there were HK$924,493.89 worth of materials in both the main storage and the non-flowing storage which were obsolete as suggested by the Defendants.  I have come to this view because of the following reasons:

(1)  I myself cannot tell from the photographs as to whether these raw materials were obsolete for the reasons suggested by the Defendants, in particular as to whether they could still be used or were suitable for the production of those tailored made production lines to be manufactured by the Factory.  These are highly technical and specialized views which the Court cannot form simply by looking at the photographs.

(2)  On the other hand, Mr Tse confirms in his oral evidence that he himself is not knowledgeable in the production and technical aspects of the manufacturing process of the Factory, as he has been responsible for the marketing and administrative aspects of MHAL and the Factory. He says therefore his evidence on the obsolete nature of the raw materials is based entirely on what he was told of by the Factory’s engineers who have carried out the inspection.  This is the same in relation to the evidence set out in Mr Tse’s 2^nd supplemental witness statement: it is also expressly stated in this witness statement and its table summarizing the defects that these views were made by the Factory’s engineers but not Mr Tse himself.

(3)  Ms Lee has elected not called the engineers to give evidence on these obsolete raw materials. Mr Tse’s above evidence on the obsoleteness of these raw materials is therefore at best hearsay evidence.  I would not attach any weight to it since:

(a)   the Plaintiffs have not been given any opportunity to test it out by cross-examining the engineers;

(b)  given Mr Tse’s own lack of knowledge and expertise in this area, he himself could not confirm or verify whether the engineers’ views are correct or not.      

(4)  The unsatisfactory nature of the Defendants’ evidence on the obsoleteness of the raw materials is further highlighted by Mr Tse’s inability to explain why they have only disposed half of these materials, and continued to keep the other half at the Factory.

(5)  In the premises, I reject the Defendants’ evidence on the proof of there were HK$924,493.89 worth of obsolete raw materials.  

(6)  If necessary, I would also accept Mr Yeung’s evidence on the continued usefulness of these raw materials. Mr Yeung’s evidence on this respect is more reliable since (a) he possesses the relevant knowledge and skill to know and assess whether the raw materials are still in good condition for potential use, as it is common ground that Mr Yeung has always been responsible for and involved in the production and manufacturing aspects of the Factory, (b) he has personally inspected these materials, and (c) this part of the evidence is not in any material way challenged under cross-examination.

159.  Secondly, I also reject the Defendants’ contention that all the raw materials kept at the non-flowing storage should be regarded as “obsolete” since they have been so treated for accounting purpose:

(1)  It is Mr Yeung’s unchallenged evidence under cross-examination that it was also the accounting practice that, when the materials were subsequently taken out for use from the non-flowing storage, the accounting staff would make corresponding adjustments in the Factory accounts to reverse the provisions that have already made for these materials in the Factory’s account books. 

(2)  As such, I cannot accept that the accounting treatment of these raw materials constitutes sufficient evidence to prove that, as a matter of fact, these raw materials were obsolete as suggested by the Defendants.

160.  In the premises, the Defendants have failed to prove to my satisfaction that the Plaintiffs were in breach of clause 10.9.3 to the extent that there was a shortfall of HK$1,080,758.03 in the value of the raw materials.

Quantum and causation

161.  For the same reasons set out above:

(1)  I accept that Ms Lee has proved that the Factory had suffered a loss of HK$168,264.14 by reason of the Plaintiffs’ breach of the warranty under clause 10.9.3.

(2)  I however do not accept that there is proof of the quantum of loss of HK$1,080,758.03 by reason of the breach[13]. 

Conclusion under Item 6

162.  I therefore conclude that, under this item of claim, the Plaintiffs should indemnify Ms Lee as agent of MHAL the sum of HK$168,264.14 by reason of their breach of clause 10.9.3.

Item 7: Excessive accounts payable

163.  The Plaintiffs provide a warranty under clause 10.9.6 of the Deed that the account payable by the Factory as at the date of the Deed was no more than HK$4,400,000.  Clause 10.9.6 provides as follows:

“The account payable by the Factory is no more than HONG KONG DOLLAR FOUR MILLIONS FOUR HUNDRED THOUSAND (HK$4,400,000.00) including account payable to 大業 (if any).”

164.  Ms Lee says the Plaintiffs were in breach of this warranty as the accounts payable as at time of the Deed should be more than HK$4,400,000.

165.  After making various concessions and clarifying certain clerical errors made in the evidence in support of this counterclaim, Ms Lee’s case is that the total accounts payable by the Factory as at May 2005 should be RMB4,552,407.55.   Initially, Ms Lee says this is more than HK$4,400,00 and therefore the Plaintiffs were in breach of the warranty.

166.  However, after Mr Dawes confirming for the Defendants at the oral closing submissions that they have initially adopted a wrong conversion exchange rate[14], he accepts that the said RMB4,552,407.55 would be equivalent to only HK$4,279,263.097[15].  This is less than the warranted figure of HK$4,400,000, and the Plaintiffs were thus not in breach of clause 10.9.6 as such.

167.  As a further and alternative submissions made in relation to the counterclaim under item 5 concerning payments made to the employees, Mr Dawes now says the total amount of the unpaid April and May salaries in the sum of RMB550,626 should also be included as part of the Factory’s accounts payable.  The breakdown of this sum is as follows:

(1)	保安工資	RMB  37,272
(2)	解雇人員	RMB  10,857
(3)	離職人員名單	RMB  84,959
(4)	一般文員四月份	RMB  67,286
(5)	一般文員五月份  (up to 21st of May)	RMB  42,539
(6)	工人四月份及五月份 (up to 21st of May)	RMB 262,713
	Total:	RMB 505,626

168.  In the circumstances, Mr Dawes submits that the total accounts payable should be RMB5,058,033.55 (RMB4,552,407.55 + RMB505,626.00), which is equivalent to HK$4,754,551.54.   This is HK$354,551.54 more than the warranted figure of HK$4,400,000.00.  The Plaintiffs (further submitted by Mr Dawes) were thus in breach of clause 10.9.3.

169.  The Plaintiffs on the other hand submit that the outstanding salaries should not be counted towards “account payable” under clause 10.9.3, since the ordinary meaning of “account payable” of a company refers only to money owed to its suppliers. 

170.  I do not accept the Plaintiffs’ contention.  The term “account payable” means what it says, it refers to any sums which should have been paid by the Factory but have not been so paid.   I do not see any reasons why this should be limited to sums payable to suppliers only. 

171.  On the other hand, I accept the Plaintiffs’ further contention that the item of employees’ security deposit (員工押金) in the sum of RMB29,600 (equivalent to HK$27,824) should not be included in the account payable as suggested by the Defendants.   This sum represents money paid by the employees and kept by the Factory as security deposits, which are repayable when the employees leave the Factory.  There is no evidence (nor it is suggested) that these deposits have been used up by the Factory.  It therefore should not be treated as part of the Factory’s account payable liability.

172.  In the premises, subject to the following deductions, I accept Ms Lee’s argument that part of the employees’ outstanding April and May salaries should be included as part the Factory’s accounts payable at the time of the Deed: 

(1)  The employees’ security deposits of HK$27,824 should be deducted from the accounts payable submitted by Ms Lee.

(2)  Items 1 and 2 of the quote made at paragraph 167 above (in the sum of RMB48,129) should also be excluded from the accounts payable, as these have already been included in the Plaintiffs’ liability to indemnify Ms Lee for payments made to the workers and security guards who had been sacked by the Factory.  

173.  As a result, the total accounts payable by the Factory in May 2005 should be RMB4,980,304.55 (RMB5,058,033.55 – RMB29,600 – RMB48,129).  This is equivalent to HK$4,681,486.28, which is HK$281,486.28 more than the warranted figure of HK$4,400,000.00.

174.  I therefore accept that it has been shown to me that the Plaintiffs were in breach of clause 10.9.6, as the account payable by the Factory as at the time of the Deed was HK$281,486.28 more than the warranted figure.

Causation and quantum

175.  For the same reasons set out above, I am satisfied that the Defendants have proved causation and quantum of HK$281,486.28, as the loss suffered by the Factory as a result of the Plaintiffs’ breach of clause 10.9.6.

Conclusion under Item 7

176.  I thus conclude that the Plaintiffs should indemnify Ms Lee as agent for MHAL the sum of HK$281,486.28 under this item of the counterclaim.

IV. Conclusion

177.  For all the above reasons:

(3)  Ms Chan succeeds in her claim against Ms Lee for HK$7,600,000 as the outstanding payment under the Deed.  There should be judgment for HK$7,600,000 entered in favour of Ms Chan against Ms Lee, with interest payable on that sum at the rate of 1% above the prime rate as from time to time quoted by the Hongkong and Shanghai Bank for the period between the date of the Writ and the date of this judgment, and thereafter at judgment rate until full payment.

(4)  Ms Lee also succeeds in her counterclaim against the Plaintiffs that they should indemnify Ms Lee the following sums:

(c)  RMB713,058.71,

(d)  HK$154,541.64,

(e)  RMB93,251,

(f)  RMB1,077,555.09,

(g)  HK$168,264.14,

(h)  HK$281,486.28.

(5)  Judgment for these sums should be entered against the Plaintiffs jointly and severally in favour of Ms Lee, with interest on these sums at 1% above the prime rate as from time to time quoted by the Hongkong and Shanghai Bank, for the period between the date of the Counterclaim and the date of this judgment, and thereafter at judgment rate until full payment.

Costs

178.  Ms Chan has succeeded in her claim against Ms Lee.  However, she has not succeeded against Mr Tse (the 2^nd Defendant) since Mr Tse is not liable to pay her any of the purchase price under the Deed. 

179.  Mr Yeung and Mr Tsui are unsuccessful in their claim against any of the Defendants, since they are not entitled to the purchase price under the Deed. 

180.  Ms Lee is only partially successful in her counterclaim against the Plaintiffs.  The counterclaim is however effectively the flip side of the defence.

181.  Mr Tse is unsuccessful against all the Plaintiffs, since he is not entitled to any indemnify under the Deed.  Moreover, none of the warranties given under the Deed were made in his favour.

182.  After considering the above circumstances of how the claim and counterclaim are made, and that Ms Lee is only partially successful in her counterclaim (and thus the defence), I believe it is fair and just to make the following nisi order in costs:

(1)  2/3 of Ms Chan’s costs in this action should be paid by Ms Lee, to be taxed if not agreed.

(2)  There will be no order as to costs as between Mr Yeung and Mr Tsui on one hand, and Ms Lee and Mr Tse on the other hand, in the claim and in the counterclaim.

183.  Further, although the Plaintiffs are represented by two counsel, given that it is Ms Tsang who has conducted most parts of the trial, I consider it appropriate and just to also give a nisi direction that it is only Ms Tsang’s costs which are recoverable and taxable under the nisi costs order.

184.  Unless any of the parties applies to vary the same in writing, the above nisi costs order and the nisi direction on taxation shall be made absolute 14 days from today.

[1]Mr Tsui King Fai (the 3^rd Plaintiff) passed away on 23 March 2008 before the trial.  Upon the application of Mr Tsui’s wife as the personal representative of his estate, on 14 November 2008 (after closing submissions for the trial have been made) I made a carrying on order under O 15 r 7 of the Rules of High Court (Cap 4A) to allow Mr Tsui’s claim as one of the Plaintiffs herein to be continued in the name of the wife with effect from 23 July 2008.

[2]Mr Tse’s brother says this happened on 23 April while Mr Yeung says it should be on 24 April.  Both side agree that it was a Sunday.  Exactly on which date the incident occurred is entirely irrelevant to the trial.  I would for convenience adopt it as 24 April 2005.

[3] Ms Lee, Ms Chan and Mr Tsui have all filed their respective witness statements.  However, the parties decided not to call Ms Chan and Ms Lee to give evidence at trial, and not to rely on their statements. Mr Tsui for obvious reasons did not give evidence at trial.  Although the Plaintiffs say they still want to rely on Mr Tsui’s witness statement in support of their case, I do not find it of any relevance to all the matters I will discuss below under the Counterclaim. I am also not inclined to give any weight to his witness statement given that the Defendants do not have chance to test out the evidence.

[4] Ms Leung’s email contained an email from her accounting staff sent to her requesting for payment of those funds for the issue of the Land Certificate.

[5] This is confirmed by Mr Yeung’s evidence given in Court.

[6] Which is supported by the service reports of each of the visits made to the customers.  The Plaintiffs have not challenged the accuracy of these reports.

[7]Or February 6, 2006, as the date of the signature was written as 02/06/06, and there is no direct evidence as to whether this refers to 6 June or February 6 of 2006.  However, whether it was signed in February or June, it would not affect my ruling based on this evidence.

[8] The Defendants initial’s counterclaim for compensation paid to Topsearch and a number of other customers was for a sum much larger than RMB322,612.  However, after it was pointed out by the Court during the trial that some of the debit notes issued by Topsearch and the other documents in support of the payment of compensation issued by the other customers relate to the months before the Deed, the Defendants at their closing submissions dropped this part of the counterclaim.

[9]In this respect, if necessary, I also find that Mr Tse should know about the fact that the employees had not been paid the salaries.  This is so because (a) before Mr Tse’s brother went to the Factory on 24 April 2005, Ms Scarlette Leung (on the instructions of Mr Tse) issued a notice to all the workers that notwithstanding the dispute between the partners, and the Factory was to suspend its production, salaries would continued to be paid.  This shows that Mr Tse and Ms Leung were in control of or were aware of the workers’ salaries payment mechanics; and (b) Mr Tse’s own evidence at trial that since the dispute had arisen between the parties, all payments of funds by MHAL to the Factory, or by the Factory could only be made with his and Mr Yeung’s joint consent.   He therefore should be in a position to know whether the workers salaries’ had been paid.

[10]Despite expressly asked by the court at the commencement of the trial as to whether they wanted to make any amendments to their pleadings, since Mr Dawes had made it clear that he would be holding the Plaintiffs strictly to the pleaded case, Mr Ho for the Plaintiffs confirmed that they needed not to amend their Reply and Defence to Counterclaim.

[11] Mr Yeung confirms in his evidence that the discrepancy in the tax free raw materials between the stocks and the C&E Book’s record might lead to the possibility (albeit a remote one) of the closing down of or suspension of the operation of the Factory. The suspension or closing down presumably would be a result of or would result in the suspension or cancellation of the relevant permits allowing the Factory to operate.  There is no evidence from the Plaintiffs to suggest otherwise.

[12]Mr Yeung under cross-examination confirms that these records are accurate and he does not challenge that.

[13]In this regard, I will also hold that the Defendants have failed to prove this quantum as there is no evidence to show the scrap value of those half of these raw materials which have been disposed of by, according to Mr Tse’s evidence, selling them to scrap materials collectors.

[14] The Defendant initially adopts in the written closing submissions the exchange rate of HK$1 = RMB0.97.

[15] The agreed exchange rate between the parties as at May 2005 is RMB 1 = HK$0.94 (or HK$1 = RMB1.06).