POON KWONG FAI, GLORY v. CHAN SO WAI, ELLENA

1996, No.A11468

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. The Plaintiff and the Defendant were friends who, in the summer of 1993, decided to go into business in partnership together in equal shares. They set up a firm under the name Mega Development Co. ("MDC" or "the Company"). The intended business of the Company, according to the Plaintiff, was general trading and also investing in stocks and shares. The Defendant however denies that it was ever intended that the Company should trade in stocks and shares : she freely conceded that both she and the Plaintiff did trade on the stock market, but did so, she said, strictly on their individual accounts. It was common ground that the computer in the Company's office provided stock market information on-line.

2. As the business progressed, the trade became more focused upon the needs of particular customers, particularly in the areas of shoe care products and wooden products. So far as the division of responsibilities among them were concerned, both parties were responsible for sourcing clients and following up orders. The Plaintiff testified that it was mainly he who travelled to China in pursuance of the Company business; the Defendant disputed this and claimed that she also travelled to China a great deal. In any event, it was common ground that it was the Defendant who dealt with all the administrative, tax and accounting aspects of the business. She prepared and kept the accounting records of the business, and the bankbooks and Company chops were also kept in her possession. The Company had accounts in various banks, of which only the account with the Kincheng Banking Corporation had credit facilities. Each of the parties had sole signing powers on all of the Company's accounts.

3. It is clear that in 1996 the parties' relationship deteriorated to the extent that, as described by the Defendant, they were not communicating face to face but rather by means of messages left for each other on pieces of paper. This came to a head in early August 1996, when the Plaintiff came across a company rubber stamp in the name "Mega", which had been delivered to the Company's office, though under cover of an invoice which was addressed to the Defendant c/o the Chun Hwa Garment Factory Limited, whose office was next door to MDC, and with which he believed the Defendant had a close relationship. The Plaintiff was suspicious that the similarity of the name "Mega" on the chop to the name of the parties' Company, "Mega Development Co.", indicated that the Defendant was going into business on her own account under that name and that she intended thereby to "steal" MDC's clients and goodwill. He made a photocopy of the invoice and used the chop to apply the stamp to the photocopy, to keep as evidence of what he believed to be the Defendant's duplicity.

4. On 6 August 1996 he confronted the Defendant who eventually admitted that the stamp was for a new business which she was planning to set up for herself. The Defendant testified that she hoped to set up this new company in order to protect her interests, since she did not have her own company whereas the Plaintiff had a company of his own named Ai Wai Ltd. (She conceded that she had known about the existence of that company since before they had entered into partnership together, and that the first office of the partnership had been rented under the name of Ai Wai Ltd.)

5. It is common ground that on 6 August 1996, after the Plaintiff had confronted the Defendant, they agreed to dissolve their partnership, and proceeded to discuss and negotiate the terms upon which this would be done. The Plaintiff testified, and I accept, that throughout these negotiations the Defendant was referring to MDC's books of account, and making calculations from time to time on a calculator. There is no dispute that it was the Defendant who was most keen to retain the business, and the negotiations concerned the price which she would pay for the Plaintiff's 50% share of the business. The negotiations finally culminated in an agreement which the Plaintiff typed up then and there in the following terms :

"A: MS ELLENA CHAN SO WAI OF ID NO: XXXXXXX(X)

B: MR GLORY POON KWONG FAI OF ID NO: XXXXXXX(X)

AGREEMENT ON PURCHASE & SALE OF MEGA DEVELOPMENT CO (MDC)

A WOULD LIKE TO PURCHASE MEGA DEVELOPMENT CO FROM B UNDER THE FOLLOWING TERMS:

1. SELLING PRICE: HK$300,000.00 (CHEQUE DATED AUGUST 10, 1996).

2. B WILL WITHDRAW FROM MDC INCLUDING COMPANY REGISTRY & BANK A/CS AFTER RECEIPT OF POINT 1.

AGREED BY A: ___________ ELLENA CHAN SO WAI DATE: 6, AUGUST 1996

AGREED BY B: ___________ GLORY POON KWONG FAI DATE: 6, AUGUST 1996"

There is no dispute that the Defendant duly signed this Agreement on 6 August 1996, and that she gave the Plaintiff a cheque for $300,000 drawn on the Company's account with the Kincheng Banking Corporation Ltd., which was post-dated to 10 August 1996 in order to give her time to raise the funds from her friends and relatives to meet such cheque.

6. The Plaintiff testified that when he saw that the cheque was drawn on the Company account he immediately told the Defendant that he required her personal cheque, since he believed that as the Agreement had been concluded between them personally, it was only right that she should pay him by means of a cheque drawn upon her personal account rather than the Company account. The Defendant told him that she did not have her personal chequebook with her at that time but promised that she would give him her personal cheque in exchange for the Company cheque on the following day. On the following day he went back to the office to pack up his personal belongings, and when he asked the Defendant for her personal cheque as agreed, she again made the excuse that she had forgotten to bring her chequebook.

7. He continued to press her for her personal cheque but she continued to make excuses. The Plaintiff concluded that the Defendant was not going to honour the Agreement which they had concluded, and he went to the Kincheng Banking Corporation and suspended the Company's account there in order to protect his interests.

8. The Defendant on the other hand testified that the written Agreement did not contain the full terms which the parties had agreed to : she stated that in addition to the terms as set out in writing, they had orally agreed two further terms upon which their partnership would be dissolved, namely :

1. That the Plaintiff would repay to MDC the sums which he had withdrawn over the years on his personal loan account with the Company;

2. That the Plaintiff would contribute 50% of any compensation which would turn out to be payable to a client of MDC, namely Theme International Limited, in relation to defective goods which that company alleged had been delivered to it by MDC, (which compensation had not been quantified by the 6 August 1996).

9. The Defendant conceded that the Plaintiff had asked her for her personal cheque on 6 August 1996 at the time that she had given him the cheque drawn on the Company's Kincheng Bank account; she testified however that she thereupon assured the Plaintiff that the cheque would be met on due date and that he had nothing to worry about, which the Plaintiff accepted. She never offered or undertook to give him a personal cheque in return for the Company cheque.

10. The Defendant testified that on the following day, 7 August, the Plaintiff came to the office and appeared to have changed his mind about the Agreement which the parties had concluded, since he suggested that in addition to the purchase price of $300,000, the Defendant should pay him his share of the Company's accumulated profits.

11. On 9 August the Plaintiff returned to the office together with a friend of his by the name of "Kwong", who she said spoke threateningly to her. A friend of the Defendant's was also present in the office on that occasion, namely one Maggie Chak, whom the Defendant had asked to help out in the office on that day. Miss Chak gave evidence on behalf of the Defendant, and testified that a heated argument took place between the parties as to whether the $300,000 did or did not include the profits of the Company. This culminated in the Plaintiff saying that "he took it as his bad luck", and that he would accept the agreed sum of $300,000 as being inclusive of the Company's profits. He then asked the Defendant to give him a personal cheque for $300,000, and the Defendant said she did not have her personal chequebook on her, and that in any event there was no difference between her personal cheque and a company cheque. Further argument ensued over this point, and finally Mr Kwong said that a company cheque would be acceptable if it was made out for $450,000, whereupon the Plaintiff said that if he was going to accept a company cheque, it would have to be made out for $600,000.

12. I find it clearly established on the evidence as a whole that the Plaintiff at all times made it clear to the Defendant that he did not accept her cheque which had been drawn on the partnership account, and that he insisted on her personal cheque.

13. The Defendant further testified that on 9 August, after the Plaintiff had relented and agreed that the $300,000 did include the Company's profits, she requested him to give her a week to seek legal advice and to have legal documents drawn up to replace the parties' "so-called agreement", and that the Plaintiff raised no objection to that request. The next development as far as she was concerned was on 12 August when she was informed by the Kincheng Banking Corporation that the Plaintiff had frozen the Company's account.

14. The Plaintiff was a good witness, and I had no reason to believe that he was being untruthful in any respect.

15. The Defendant represented herself throughout these proceedings, and was assisted by her next friend Mr Kevin Chan who sat by her side and advised her throughout the trial. I did not find her to be a convincing witness. There were some substantial improbabilities in her case, which she was unable to offer any satisfactory explanation for.

16. It was evident that she had acquired some experience of the business world before she entered into the partnership with the Plaintiff : she stated that she had been involved for seven to ten years in sales work, merchandising, accounting and administrative work. She testified that she did realise the importance of signing a written agreement, yet when asked why she had signed the Agreement of 6 August 1996 when, according to her, two major terms that had been agreed were omitted from it, she could only lamely answer that she trusted the Plaintiff to honour the terms which had been omitted.

17. It does not require a legal training to appreciate the importance of signing a written agreement, and the obvious disadvantages and dangers of doing so when such written agreement omits certain major terms which were allegedly part of the Agreement which had been concluded. The Defendant struck me as a person of common sense and some education, and I do not believe that she would have signed the Agreement, which appears on the face of it to be complete, knowing as she did, on her version, that the aforesaid major terms had been omitted from it.

18. She testified that at the time of their negotiations on 6 August she did not know how much the Plaintiff in fact owed to the Company on account of his personal drawings; however it was common ground that the Plaintiff did, during that meeting, produce a hand-written three-page document detailing his drawings up to 1 July 1996. In any event I find that the Defendant had at least a rough idea of how much the Plaintiff had drawn on his personal loan account, since it was she who had at all times handled all the Company's books and records of account. Subsequent to the meeting, she quantified the Plaintiff's indebtedness to the Company in respect of his personal drawings at $447,225.28.

19. The Plaintiff testified that his drawings had been for various purposes, including buying shares on the partnership account, reimbursing expenses as well as simply "director's income". On each occasion he had accounted to the Defendant, from whom he had to obtain the Company cheque book in order to issue a cheque to draw the funds in question. She agreed that both she and the Plaintiff had always been free to make personal drawings at will on the partnership account, though she said this was always subject to the understanding that these amounts would be reimbursed to the Company in due course. She admitted in cross-examination that the Company's books reflect that her current account with the Company reflected a debit of some $327,000, which amount she agreed that she currently owed the Company. However as at 6 August 1996 she said that the Company owed her approximately $33,000 on her current account.

20. It was common ground that it was a term of the Agreement of 6 August 1996 that the Plaintiff would withdraw from MDC and have nothing further to do with it after he had received the $300,000 from the Defendant. It follows that the $447,225 which the Defendant says the Plaintiff agreed to repay to the Company would, in reality, belong to the Defendant since she would with effect from 6 August 1996 be the sole proprietor and shareholder of the Company. It is curious, to say the least, that the Defendant should have solemnly drawn a cheque in favour of the Plaintiff for $300,000 to honour her part of the Agreement when, on her version, in terms of the same Agreement she had coming to her a sum well in excess of $300,000, which it would have been obvious to her should have been set off against the $300,000 which she owed, leaving a balance in her favour of $147,000 owed her by the Plaintiff. In other words on her version of what had been agreed, the simple fact, which would have been obvious to her, was that she did not owe the Plaintiff any money and there was no need for her to draw a cheque in his favour in any sum. (Even if the $447,225 payable by the Plaintiff to the Company was attributable notionally in a proportion of 50% to the Plaintiff and 50% to the Defendant, this would still have meant that she personally stood to receive $223,412 and again it would have been glaringly obvious to her that such sum should be set off against the $300,000 payable by her, leaving a net balance of only $77,600 which she would be required to pay.)

21. I accept the Plaintiff's evidence that the parties discussed all these matters exhaustively during their negotiations on 6 August, with the Defendant constantly examining the books and records of account and doing calculations on her calculator. Bearing in mind that :

(1) the Defendant had at least a rough idea of what the Plaintiff's personal drawings amounted to, both from her previous dealings with the accounts - I accept the Plaintiff's evidence that he had accounted to her each time he had made such drawings - and from her calculations during the meeting; and

(2) she knew the profits which MDC had accumulated by the date of the meeting and what profits it was capable of and likely to be able to generate in the future;

I believe the Plaintiff's version that the Defendant agreed to waive her entitlement to the reimbursement by the Plaintiff of his personal drawings from the Company.

22. In relation to the Plaintiff's alleged agreement to be responsible for 50% of whatever was found to be owing to Theme International Limited ("Theme"), the Defendant admitted in cross-examination that even today, some 15 months after her Agreement with the Plaintiff was concluded, Theme has still not made any claim against MDC or against the Defendant, despite the fact that the Defendant has continued to deal with Theme since then, and has urged it to put in a claim. She also testified, when pressed, that the total amount of compensation payable to Theme was in the region of $30,000. This only serves to support, in my view, the Plaintiff's case that during the negotiations on 6 August, the possible claim by Theme against MDC was an imponderable which the Defendant agreed to "take on board" as part of the package deal which she concluded with the Plaintiff.

23. The Defendant conceded that at no time prior to and including the 12 August were there sufficient funds in the account to meet the cheque which she had drawn, but stated that the cheque would nevertheless have been met by the Bank if it had been presented for payment by the Plaintiff, in view of the credit arrangement which the parties had with the Bank, in terms of which the Bank honoured cheques presented to it which were drawn on the partnership account even if there were insufficient funds in the account, provided that the funds were deposited by 11 a.m. on the following working day. Even accepting, on the basis of such credit arrangement, that the Bank would have honoured this cheque if the Plaintiff had presented it, the Plaintiff was fully entitled in terms of the Agreement concluded between the parties to insist on the Defendant's personal cheque, as I find that he did, and it is no answer to the Plaintiff's claim for the Defendant to say that the Company cheque which she had drawn would have been honoured if presented.

24. The Defendant's two witnesses respectively testified that the Plaintiff had on 7 and 9 August claimed that the Agreement had not included the profits of the partnership, which the Plaintiff denied. On the evidence, there was on 7 August 1996 no discussion of any seriousness or substance between the parties in relation to the Agreement; on 9 August, by contrast, a serious discussion did take place between the Plaintiff and his friend Mr Kwong on the one hand and the Defendant and her friend Maggie Chak on the other hand. Even on the version of the Defendant and her witnesses, the Plaintiff, having initially attempted to re-negotiate the terms of the Agreement to make it clear that it did not include the profits of the partnership, ended up by "accepting that it was his bad luck" and accepting that the agreed terms did include the profits of the partnership.

25. The Defendant alleged, in her Defence and Counterclaim which were drafted on her behalf by solicitors who were then representing her, that by his conduct in informing her on 7 August 1996 that the purchase price of $300,000 did not include the profits of the partnership, the Plaintiff repudiated the Agreement and that the Defendant accepted such repudiation.

26. Putting the evidence for the Defendant at its highest however, the Plaintiff did attempt to re-negotiate the terms of the Agreement on 7 and particularly 9 August 1996, but in response to the Defendant's refusal to do so he accepted that the Agreement which they had concluded did include the partnership profits. On these facts the Plaintiff did not repudiate the Agreement of 6 August 1996. Nor do I accept that the parties agreed that the Defendant would be given further time to enable her solicitors to re-draft the Agreement; I note that even the Defendant did not put it that high, saying merely that the Plaintiff did not raise any specific objection to such suggestion. In any event it is clear that nothing further was done in that respect, and no re-drafted agreement has ever been produced by the Defendant.

27. Matters became considerably more complicated when the Plaintiff proceeded, on 12 August, to freeze the partnership account at the Kincheng Banking Corporation. I accept the Plaintiff's evidence that he did this solely in order to protect his interests, since he believed that he remained liable in law to the extent of 50% on that account, and since the Defendant had demonstrated her untrustworthiness, it was necessary for him to freeze the account in order to preclude his liability for any further transactions which the Plaintiff might conduct upon such account before he had made arrangements to withdraw his name from it.

28. The Defendant claims that she has suffered damages in consequence of the Plaintiff's freezing of the account, in that MDC was thereafter unable to obtain a letter of credit which it was required to do in order to complete a trading transaction which was in the pipeline on 6 August, and which matured shortly thereafter. However, she conceded under cross-examination that another company had, at her request, arranged for the required letter of credit to be issued on behalf of MDC, and the latter had therefore been able to successfully complete the transaction in question, earning a profit of some $100,000 in the process. Nevertheless, she had had to pay a sum of approximately $40,000 to the other company for its services in arranging for the letter of credit to be issued, and this is the amount in which, when she was pressed during her evidence, she quantified her counterclaim for damages against the Plaintiff in consequence of his wrongful suspension of the partnership account.

29. While I accept that the Plaintiff was motivated solely by a desire to protect his own interests in freezing the account as he did, his action in doing so was in breach of his continuing duty of good faith towards his ex-partner, the Defendant, which duty he continued to owe her notwithstanding that he had withdrawn totally from the partnership with effect from 6 August 1996.

(See Lindley and Banks on Partnership, 17th Edn., 16-06.)

The consequence of such wrongful action was to cause the Plaintiff to suffer the additional expense of paying $40,000 to obtain the necessary letter of credit through the services of another company, and the Plaintiff is in my view liable to the Defendant for damages in that sum.

30. The Defendant shortly thereafter chose to terminate the operations of MDC : she formally notified the Business Registration Office of the Inland Revenue Department on 10 September 1996 that the Company was ceasing to carry on business with effect from that day. It is clear that there was no need for her to adopt this course : there was nothing to stop her continuing to trade through the vehicle of the Company, either by taking in another partner or on her own account. She also agreed that the freezing of the Kincheng Banking Corporation account did not preclude her from doing so either, since she could have opened further bank accounts in order to continue trading.

31. Instead she almost immediately took up employment with another company (the first character of whose Chinese name is the same as that of MDC), which also traded in wooden products and which she admitted has inherited at least one major client from MDC.

32. In all the premises I grant judgment as follows :

(1) for the Plaintiff in the sum of $300,000 together with interest thereon at the investment rate with effect from 12 August 1996;

(2) for the Defendant on her counterclaim for damages in the sum of $40,000;

(3) as far as costs are concerned, I intend to deal with them globally rather than making separate orders in relation to the claim and the counterclaim, and to that end I make an order nisi that the Defendant is to pay 80% of the Plaintiff's costs of these proceedings as a whole.