NEWS CLEANING SERVICES CO LTD v. WATSON ENVIRONMENT MANAGEMENT LTD

HCA 2244/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2244 OF 2009

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J U D G M E N T

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A. INTRODUCTION

1.  In this action, the plaintiff claims that it had entered into two agreements with the defendant to provide cleaning services for Island Place in North Point and Prince’s Building in Central respectively.  The plaintiff says it had carried out the services as agreed until November 2008 but the defendant failed to pay the agreed amount for the period between July and November 2008.  The plaintiff claims $340,800 in relation to Island Place and $354,100 in relation to Prince’s Building.

2.  In stark riposte, the defendant contends that the plaintiff did not in fact provide any services and that the whole arrangement was a scam perpetrated by the plaintiff and an employee of the defendant, Mr So Kwok Hung Dick (“So”), with the object of siphoning the defendant’s money to the plaintiff.

3.  Not only is the plaintiff not entitled to any further payment, the defendant says, but the payments already made to the plaintiff were the fruits of So’s breach of fiduciary duties to the defendant and his conspiracy with the plaintiff, and recoverable as such. The defendant therefore counterclaims $3,178,800, being the amount of money it paid the plaintiff between 2006 and 2008.

B.  BACKGROUND

The plaintiff

4.  The plaintiff is a company incorporated in Hong Kong, with two shares of $1 each issued to Mr Ho Chi Ming (“Ho”) and Mr Fung Chi Wah respectively, who were also its only two directors.  Ho had since the 1990s run a business of providing cleaning services with the same name as the plaintiff.  The business was incorporated in around 2000 and had since then been operated by the plaintiff.

The defendant

5.  The defendant is also a company incorporated in Hong Kong.  It is part of the ESG group, a group of companies carrying on business in the provision of environmental and cleaning services.  The immediate holding company of the defendant is Watson Environmental (China) Services Limited (“Watson China”), which is held by ESG Holdings Limited. 

6.  Mr Tuet Sui Hong Ali (“Tuet”) is the Chairman of ESG Holdings Limited.  His father was a pioneer in the cleaning industry in Hong Kong who had set up HK Social Services Co Ltd, which later became Reliance Services Limited, a joint venture with Jardine Pacific Limited. 

7.  There was a merger between the businesses of Tuet and Mr Tsui Ka Tsuen Peter (“Tsui”) in the early 2000s, as a result of which they both held stakes in the ESG group.  Tsui became the Chief Executive Officer of the group and Mr Wan Lap Hing (“Wan”), an associate of Tsui, became the Chief Operating Officer.  Tuet and Tsui were both directors of ESG Holdings Limited.  Tuet, his wife, and Tsui were the directors of Watson China.

8.  Tsui also became a director of the defendant on 1 November 2005 and Wan became a director on 5 January 2006.  From then until August 2007, Tsui and Wan together with Tuet were the three directors of the defendant.

9.  In about 2005, Tuet envisioned a major expansion of the ESG group in Hong Kong, Macau and Mainland China.  His aim was to double the size of the business through this expansion.  At about this time, Tsui made a proposition to Tuet “to fast-track the growth of the defendant”.  He proposed that Watson China (which then held 100% of the issued shares of the defendant), should sell 50% of the shareholding in the defendant to a company called Profit Up Holdings Limited (“Profit Up”).  Profit Up would undertake to bring about a three-year expansion in the business of the defendant so that its revenue would increase to $100 million over three years.  If Profit Up failed to deliver on its promise, Watson China would be free to buy back the shares.

10.  Tuet considered the proposal to be an aggressive plan, but since Tsui had recommended Profit Up and under the proposal Watson China could buy back the shares if Profit Up did not deliver, he accepted it.  As a result, Watson China transferred 50% of the shareholding in the defendant to Profit Up on 30 December 2005.

11.  Profit Up is a company incorporated in Hong Kong.  It had seven shareholders.  One of them was So, who held 20% of the shares and was one of its two directors.  Tsui is neither a director nor shareholder of Profit Up but it is to be inferred that he had some connection with its shareholders, since he recommended it as the transferee of the 50% shareholding in the defendant.

12.  In early 2006, Profit Up nominated So to work in the defendant as its Operations Director, though he was not made a company director of the defendant until 1 August 2007.  As Operations Director, he reported to Tsui.  In the hierarchy of the defendant, he ranked immediately below the three directors.

13.  In late 2007, Tsui’s and Wan’s relationship with Tuet turned sour.  On 4 January 2008, Tsui sold his shares in the ESG group to Tuet and he and Wan left the group companies including the defendant.  After that, while So retained his position, he seldom went back to the office. Eventually, on 3 September 2008, So resigned from his directorship in the defendant.  On 30 October 2008, Watson China bought back the 50% shareholding in the defendant from Profit Up.

The main contracts

Island Place

14.  In late 2005, the defendant won the tender of the cleaning services for the shopping arcade in Island Place in North Point. On 22 November 2005, Swire Properties Management Limited (“Swires”) wrote to the defendant’s Operations Manager, Mr Kwok Kit Sang (“Kwok”), enclosing the contract to be signed, which was for the two years of 2006 and 2007.  The contract amount was $210,000 per month.  Additional unit rates were specified for the cleaning of external walls and tenanted areas.  The contract has not been disclosed by the defendant in these proceedings.

15.  In December 2007, the defendant won the tender again for the following two years, at the sum of $245,000 per month plus specified rates for external walls and tenanted areas.  The tender as accepted by Swires formed the written contract between the parties.

Prince’s Building

16.  The defendant was also awarded the contract for cleaning services for Prince’s Building for the year 2007, covering both the shopping arcade and office tower.  The written contract signed with Hongkong Land (Property Management) Limited (“Hongkong Land”) was dated 2 February 2007, but it is not in dispute that the arrangements had come into effect in January 2007.  The contract sum was $215,197.50 per month for the office tower ($2,582,370 for the whole year) and $182,972.50 per month for the shopping arcade ($2,195,670 for the whole year).  Unit rates were specified for special tasks such as restoration of marble floor of the shopping arcade and cleaning of external walls.  Separate sums were provided for toiletries supplies.

17.  There was no separate written contract for 2008.  Instead, the 2007 contract was extended a number of times to at least the end of 2008.

C.  THE PARTIES’ PLEADED CASES AND THE ISSUES

18.  The plaintiff’s claim is a simple one for payment of sums due under two contracts.  It is common ground that the defendant has not paid the plaintiff’s invoices in respect of the months from July to November 2008.

19.  The defendant’s case can be summarised as follows.  There was no bona fide agreement made between the plaintiff and the defendant.  The plaintiff did not do any work pursuant to the arrangements. The payments made to the plaintiff were not made for any actual work done by the plaintiff, but for the purpose of “siphon[ing] out the earnings of the defendant into the hands of the plaintiff” (para 10 of the Amended Defence and Counterclaim).  The invoices issued by the plaintiff to the defendant were “fabricated” (para 22 of the Amended Defence and Counterclaim). 

20.  Even if the agreements were genuinely entered into, the defendant says that it was not bound by them because So had no authority to contract with the plaintiff on the defendant’s behalf.

21.  Further, the defendant contends that So breached his fiduciary duties to the defendant by, inter alia, entering into the agreements with the plaintiff.  The plaintiff dishonestly assisted So in such breaches and is therefore liable as constructive trustee.  Finally, the defendant claims that the plaintiff and So conspired to defraud the defendant.

22.  The main issues raised can be divided as follows:

(1)     Did the plaintiff and So enter into genuine commercial agreements as alleged by the plaintiff, or did they instead perpetrate a fraudulent scheme to siphon the defendant’s money to the plaintiff?

(2)     If there were genuine commercial agreements between the parties, did the plaintiff perform their part of the agreements so as to be entitled to payment for the period from July to November 2008?

(3)     If So did enter into the agreements with the plaintiff, did he act with actual or apparent authority so as to bind the defendant?

(4)     As regards fiduciary duties: (a) did So owe any fiduciary duties to the defendant? (b) did So breach any such fiduciary duties? (c) did the plaintiff dishonestly assist him in such breach?

(5)     As regards conspiracy, did So and the plaintiff combine to defraud or injure the defendant using unlawful means?

D.  THE WITNESSES

23.  The plaintiff called seven witnesses at trial, as follows:

(1)     Ho;

(2)     Ms Lam Yuet Sheung (“Lam”) – a manager and accountant of the plaintiff.  She is related to Ho in that he was the brother of her sister’s husband;

(3)     Mr Ho Kwok Leung (“KL Ho”) and Mr Choy Kai Tak (“Choy”) – cleaning supervisors who worked in Prince’s Building at the material times;

(4)     The last three witnesses of the plaintiff were representatives of sub-contractors that the plaintiff says it engaged in order to provide cleaning services pursuant to the agreements with the defendant.  They were (i) Mr Lok Kin Chuen, the proprietor of Chuen Kee Cleaning Company (“Chuen Kee”), a business that provided garbage removal services by garbage trucks; (ii) Mr Fung Ping Chung, the owner of Billion-Plus Services Company Limited (“Billion-Plus”), a company that supplied casual labour; and (iii) Ms Kan Mei Ha, the marketing manager of Shing Fung Construction Material Limited (“Shing Fung”), a company that supplied vehicles with elevated work platforms for use in cleaning external walls of buildings. The evidence of these three witnesses was not challenged at all.

24.  The defendant called four witnesses, namely:

(1)  Tuet;

(2)  Mr Terence Brewster (“Brewster”), an employee of the defendant with the title of Business Development Director at the time.  He became a company director of the defendant on 4 January 2008 when Tsui and Wan resigned;

(3)  Mr Tang Shu Keung, a cleaner working in Prince’s Building at the time.  His evidence was brief and uncontroversial.

(4)  Kwok, the Operations Manager of the defendant at the time and the direct subordinate of So.  He is now the Assistant General Manager of the defendant.

E.  THE FACTS AND EVENTS

25.  In this section I deal with the main facts and events.  My findings on the facts will also be determinative of the issues set out in paragraph 22(1) and (2) above.

(1)  The agreements

The parties’ cases

26.  The plaintiff’s case is that the agreement relating to Island Place was reached orally between Ho and So in a meeting between them in around November 2006 in the food court of Island Place. 

27.  In essence, the agreement was that the plaintiff would provide the necessary equipment and machines, hire workers and engage any further necessary contractors for the purpose of carrying out the cleaning services for Island Place under the main contract with Swires.

28.  The defendant would deduct around 13.4% of the fees received from Swires each month as its own income.  After paying the workers’ wages, their mandatory provident fund payments, insurance premia for workers’ compensation, direct payment to contractors, other expenses including workers’ claims, the cost of cleaning materials and utilities charges of the on-site office, the defendant would pay the balance to the plaintiff as its sub-contractor’s fees.

29.  The plaintiff says it was also part of the agreement that for each month the defendant would prepare and send to the plaintiff a monthly statement setting out the fees received, the defendant’s income deducted, the expenses and the fees due to the plaintiff, and the plaintiff would issue an invoice to the defendant accordingly.

30.  As for Prince’s Building, the plaintiff says that the agreement was also reached orally between Ho and So, in a meeting in January 2007 in a coffee shop at Exchange Square.  Choy went with Ho to that meeting.

31.  The terms of the agreement were essentially the same as those for Island Place, except that the defendant would deduct only around 8% of the fees received as its income (instead of 13.4%).

32.  It is common ground on the pleadings that the main contracts for Island Place and Prince’s Building both did not allow the defendant to sub-contract the cleaning services without the respective consent of Swires and Hongkong Land (to whom I shall refer generically as the landlords).

33.  Clause 11 of the main contract relating to Prince’s Building provided:

“The Contractor may not assign or transfer the whole or any part of its interest or obligations under this Agreement. The Contractor may however sub-contract part of the Work if it first obtains the approval of the Employer for each Sub-Contractor and their staff to be used in the Building. The Contractor must supply to the Employer full details of each Sub-Contractor and staff member to be employed.”

34.  Clause 2.2 of the Standard Terms and Conditions of Contract relating to Island Place attached to the tender for the years of 2008 and 2009 provided:

“Neither the Employer nor the Contractor shall, without the written consent of the other, assign this Contract.”

There is no direct evidence of terms of the main contract with Swires for the preceding period, but I think it is likely that it contained the same provision as this clause 2.2. 

35.  This clause does not appear to me to prohibit sub-contracting.  What it does is to prohibit assignment of the contract by either party.  Be that as it may, the evidence, which I accept, is that it was usual in the industry for the main contract to stipulate that sub-contracting required the consent of the landlords.  I find that it was also the understanding of So and Ho that under the main contracts, sub-contracting required the consent of the landlords.

36.  Because of this, the plaintiff says, it was also part of its agreements with the defendant that the workers in both Prince’s Building and Island Place would be formally registered as employees of the defendant and wear the defendant’s uniform when working in those buildings.

37.  The defendant’s case is that there were simply no such agreements.  Instead there was a conspiracy between the plaintiff and So that the plaintiff would issue fictitious invoices to the defendant for no work done so as to siphon off the defendant’s money.

38.  The defendant submits that the plaintiff’s case is inherently incredible because the alleged agreements made no commercial sense.  They made no sense because, the defendant says, there was nothing to be done by the plaintiff under the agreements that the defendant could not itself have done.  The involvement of the plaintiff was wholly unnecessary and it is to be inferred that the interposition of the plaintiff was nothing but a stratagem to channel the profit flowing from the main contracts away from the defendant.

The burden and standard of proof

39.  Before discussing the evidence further and finding the facts, I should set out the position as I see it regarding the relevant burden and standard of proof.

40.  At this stage of the analysis, where the issue is whether the agreements existed, the burden lies on the plaintiff to prove the agreements it contends for on a balance of probabilities. 

41.  Although the defendant has mounted a positive case that there was a fraudulent scheme, it bears no burden at this stage (as opposed to the stage of assessing its counterclaim of conspiracy and dishonest assistance) to prove that there was in fact no genuine commercial agreement but a scam.  It does, however, bear the evidential burden of adducing evidence probative of such fraudulent scheme. 

42.  Even though the defendant does not bear the burden of proof, in evaluating the evidence relied upon by the defendant, given the seriousness of the allegations it makes, the cogency of the evidence must be assessed applying, by analogy, the standard enunciated in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, that is to say, the civil standard of proof on a balance of probabilities but flexibly taking into account that “the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability” (Re H, at p 586): see Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387 at paras 182-184.

43.  It is important to examine the circumstances of the particular case and what the real issues are.  As Lord Nicholls said in Re H at p 586, the inherent improbability as a factor affecting the requisite degree of cogency of the evidence is to be taken into account “to whatever extent is appropriate in the particular case”.  This was emphasised by Lord Hoffmann in In re B (Children) [2009] 1 AC 11 at 21B-C, para 15.

44.  Moreover, insofar as the defendant asks the Court to infer fraud from circumstantial evidence, I remind myself of the need for caution.  As Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387 at para 185, Ribeiro PJ said:

“Where, as in the present case, the court is invited to reach a conclusion of forgery as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question.”

45.  In particular, the inference must be “a compelling inference … sufficient to overcome the inherent improbability” that the serious wrongdoing alleged would have occurred: HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336 at para 72 per Sir Anthony Mason NPJ.  I have evaluated the evidence bearing these principles in mind.

Whether agreements fraudulent for lack of commercial sense

46.  I am unable to accept the defendant’s argument that the arrangements must have been fraudulent because the alleged agreements between the plaintiff and the defendant did not make commercial sense.

47.  By the arrangements, the defendant was able to secure a virtually guaranteed income as a fixed proportion of the fees received from the landlords.  It passed the risk of workers’ claims, increase in workers’ wages, increase in sub-contractors’ fees, and increase in employees insurance premia to the plaintiff.  It was able to rely on the plaintiff to assemble the workforce both from the staff of the previous cleaning company working at the sites and from other workers that the plaintiff managed to find through its connections.  It was able to rely on the plaintiff to engage, deal with and pay the specialised sub-contractors.  It was able to delegate most matters of site management to the supervisors seconded from the plaintiff.

48.  The arrangements have been described as sub-contracting.  I am content to adopt this terminology in this judgment but it is to be noted that it is not an ordinary sub-contracting arrangement, but one where the individuals who actually did the work would be registered as employees of the defendant.  They included the workers recruited by the plaintiff and the supervisors and foremen “seconded” from the plaintiff.

49.  There was an assertion in the plaintiff’s evidence that the practice of general sub-contracting, ie sub-contracting of the general cleaning tasks as opposed to discrete, specialised tasks, was widespread in the cleaning industry.  There was an opposite assertion in the defendant’s evidence that such practice was rare, if not unheard of.  I am satisfied that such sub-contracting was at the time not unknown in the industry, and that the arrangements with the defendant in relation to Island Place and Prince’s Building were not the only occasion on which the plaintiff had acted as a general sub-contractor.  Indeed, so far as the plaintiff is concerned, the evidence of the witnesses including Lam, Choy and KL Ho, which I accept, is that such general sub-contracting was quite common and that the plaintiff had often acted as a general sub-contractor.

50.  Tuet gave evidence that the core competence of a cleaning company such as the defendant is the ability to manage a large number of cleaning workers.  He said that the defendant was a premium cleaning company employing a large number of workers.  However, he also accepted that the number of cleaners employed by the defendant at any one time was a function of the number of sites on which it was working.  The defendant did not have a fixed permanent staff waiting to be deployed to whatever buildings the defendant had won contracts to clean.

51.  There was no evidence in the defendant’s witness statements as regards its financial performance and how the agreements affected that performance, or any financial analysis as to why the agreements did not make commercial sense.  In his cross-examination, Tuet tried to fill that gap by asserting that the profit structure of the cleaning industry was standard: for every dollar of income received from the landlord, 70 cents would go to the cleaners’ wages; 10 cents would be spent on site support, which included workers’ uniform, cleaning materials, toiletries supplies, mobile phones and pagers; 10 cents would cover sunken costs such as office overheads; the remaining 10 cents would be the profit.  He said that the alleged agreements with the plaintiff did not make sense from the defendant’s point of view because the income for the defendant would barely cover the overheads. 

52.  I do not think it is safe to infer fraud on the basis of that kind of “back of the envelope” calculation which did not even feature in Tuet’s witness statement.  In any event, Tuet also admitted that up to a certain level, the fixed costs of the defendant including the overheads were “flat”, in the sense that they would not increase proportionately with an increase in the volume of business.  It seems to me to follow that up to that level, any further income that the defendant could derive from additional contracts would mean additional profits.  It is therefore at least possible that with an arrangement such as the agreements in question, additional income could be generated without putting pressure on the administrative costs to increase.

53.  I must make clear that I am by no means paying an encomium to the practice of sub-contracting in the cleaning industry.  I am satisfied however that there could be genuine commercial reasons for cleaning companies to decide to enter into sub-contracting arrangements such as that concerned in this case.  I therefore reject the contention that the alleged agreements between the plaintiff and the defendant were so lacking in commercial sense that it ought to be inferred they were part of a fraudulent scheme to misappropriate the defendant’s money.

54.  I am fortified in that conclusion by the fact that when So handed over the arrangements to Kwok in January 2008, Kwok found nothing untoward and saw fit to continue the arrangements.  I shall deal with what happened at the handover meeting and thereafter in greater detail in paragraphs 63 to 65 and 98 to 110 below.  I do not accept Kwok’s suggestion that he had little idea what the arrangements were about and was simply following what So had been doing.

55.  I should mention that Tuet suggested during his testimony that the plaintiff was ultimately owned by Profit Up, and that the owners of Profit Up included Tsui and Wan, who formed a syndicate to siphon off the defendant’s profits.  There is absolutely no evidence for this assertion and the defendant’s counsel quite properly did not put this to any of the plaintiff’s witnesses.

Evidence relating to the agreements

56.  There is in my view a significant amount of evidence that supports the existence of the agreements. 

57.  First, there is Ho’s evidence that he reached the oral agreements with So.  The defendant points out that there was an invoice from the plaintiff to the defendant relating to Island Place dated 30 September 2006, and so Ho could not have first entered into the agreement with So in November 2006 as Ho said.  In response, Ho said he might have made a mistake about the month in which the agreement relating to Island Place was made.  Ho also explained that before making the agreement with So, the plaintiff was already the sub-contractor of a company called ISS which was the main cleaning contractor preceding the defendant at Island Place.  The plaintiff had in turn further sub-contracted the work to Today Cleaning Co., Limited (“Today Cleaning”).  I accept Ho’s evidence in these respects.  As I shall elaborate below, the existence of the agreement in relation to Island Place is also supported by, inter alia, the invoices issued by Today Cleaning to the plaintiff for fees for general cleaning work.

58.  The existence of the agreement in respect of Prince’s Building is supported by Choy’s evidence.  He gave his evidence in a straightforward manner and I accept him as a witness of truth.  He told of the occasion when he went with Ho to have a meeting with So in early 2007.  He heard that So asked the plaintiff to carry out cleaning services in Prince’s Building.  For that purpose, the plaintiff would be required to recruit staff, give instructions to and arrange for the staff to perform the relevant duties in accordance with the requirements of the landlord.  He also heard that the staff would be hired in the defendant’s name and their wages would be paid directly by the defendant.

59.  Lam also gave evidence that she understood that the defendant had asked the plaintiff to work in Prince’s Building and Island Place.  She considered the plaintiff to be a sub-contractor of the defendant and took steps to perform that sub-contract.  She knew the terms on which the plaintiff was to be paid including the amounts the defendant would retain as its own income and the amounts it would deduct as expenses before paying the balance to the plaintiff.  She checked the monthly statements she received, initially from So, and liaised with him on the amounts of payments.  At a later stage she received the monthly statements from Kwok.  I have found Lam to be a straightforward witness whose evidence also accords with inherent probabilities.

60.  I accept the evidence of these witnesses in these respects, which is also corroborated by other evidence. 

61.  What the plaintiff did afterwards pursuant to the agreements seems to me to be inconsistent with the suggestion that there was a fraudulent scheme to divert the defendant’s money to the plaintiff for no work done.  I shall describe in greater detail the work done in paragraphs 68 to 91 below.  Suffice it to say at this point that, for Prince’s Building, the plaintiff sent in supervisors, assembled the staff, kept record of staff attendance, and engaged and paid sub-contractors.  As for Island Place, the plaintiff engaged a general sub-contractor (Today Cleaning) as well as specialist sub-contractors (garbage trucks and vehicles for cleaning external walls).  Such acts are more consistent with, and support, the existence of the agreements.

62.  These acts are moreover evidenced by a large number of documents that the plaintiff had kept as part of its records and disclosed in these proceedings.  They include staff attendance schedules and work orders placed by tenants in the buildings, leave applications by workers, invoices from sub-contractors such as Today Cleaning, Chuen Kee and Shing Fung, and general ledgers.  None of this documentation has been attacked by the defendant as fictitious or fabricated.  The existence of these documents and the plaintiff’s possession of them seem to me to be a pointer towards the existence of the alleged agreements.

63.  In my view, the existence of the agreements is also supported by what happened at the handover meeting among So, Kwok and Lam in about January 2008 (see paragraphs 98 and 99 below).  At that meeting, Kwok was told that the plaintiff was “working for the defendant” in relation to Prince’s Building and Island Place.  Kwok was instructed by So to take over and continue the arrangements relating to monthly statement, invoicing and payment. 

64.  If those arrangements were no more than a scam to siphon funds from the defendant to the plaintiff who was doing nothing in return, it seems to me highly improbable that So would have handed over the responsibilities to Kwok and told him to carry on the arrangements.  Kwok was a long-standing employee of the defendant who would soon be reporting directly to Brewster as So began to “fade out” in early 2008.

65.  Kwok was an experienced Operations Manager of the defendant who was familiar with the industry.  Not only did he carry on with the arrangements with the plaintiff, in the statements that he prepared he also introduced a variation of the terms in relation to the proportion of the gross income for one-off jobs to be retained by the defendant as its own income.  In the case of Prince’s Building, for the month of February 2008 onwards, the defendant decided to keep 30% [1] of the gross income for one-off jobs for itself (while the percentage of the general income kept by the defendant remained at 8%).  In the case of Island Place, the proportion of the gross income for one-off jobs retained by the defendant was also increased to 30% for the month July 2008 onwards, with the percentage applicable to the general income unchanged at 13.4%.

66.  Finally, without drawing any adverse inference for present purposes, I note that there is no evidence at all from So, Tsui or Wan, who signed the defendant’s cheques for the fees paid to the plaintiffs pursuant to the agreements between November 2006 and November 2007 (see paragraph 148(2) below), to deny the existence of the agreements with the plaintiff.

Conclusion on agreements

67.  I am satisfied, on the balance of probabilities, that there were at the time genuine commercial agreements reached between So (acting on behalf of the defendant) and Ho (acting on behalf of the plaintiff) with the terms described in paragraphs 27 to 31 and 36 above.

(2)  Plaintiff’s Performance of the Agreements

68.  There is a substantial amount of oral and documentary evidence of what the plaintiff did between 2006 and 2008 in relation to Prince’s Building and Island Place, which was done – on the plaintiff’s case – pursuant to and in performance of the agreements with the defendant.  Paragraphs 69 to 91 below summarise the relevant evidence that I accept and also represent my findings.

Prince’s Building

69.  Pursuant to the agreement relating to Prince’s Building, the plaintiff sent experienced staff to work on site and helped put together the team of workers that were to perform the cleaning services.

70.  Soon after Ho reached an agreement with So in relation to Prince’s Building, he asked Choy to go to the site to make arrangements.  Choy was a senior supervisor.  He had worked for the plaintiff since 2000.

71.  Choy went to Prince’s Building and asked the existing cleaning workers, who had been working there under the previous cleaning company, to stay on and continue to work there as the defendant’s employees.  Over twenty such workers agreed to stay on.

72.  Choy’s evidence was corroborated by the evidence of the defendant’s own witness, Tang Shu Keung.  He was one of those cleaning workers who were already working in Prince’s Building before the defendant won the tender for 2007.  He said that it was Choy who contacted him and asked if he would stay on to work in Prince’s Building.

73.  A few months later, KL Ho, a supervisor, was also sent by the plaintiff to work at Prince’s Building.  He had also worked for the plaintiff since 2000.  He started working for the Prince’s Building site in around April 2007.

74.  The supervisor, ie initially Choy and later KL Ho, functioned as the site manager.  He would be responsible for getting more staff if there was a shortage of manpower.  This could be done by recruitment of employees, or by engaging casual labour on a daily basis.  When casual labour was needed, he would inform Lam who would contact Billion-Plus, which would arrange for the required workers to attend and issue an invoice to the plaintiff for the wages.

75.  If there was any relevant complaint about cleaning services, the landlord would contact the supervisor.  He would be responsible for following up the complaint.  Likewise, if there was any request for special jobs, the landlord would also contact him.  He would in turn tell Lam, who would give a price quotation, which would then be reported to Kwok and also relayed to the landlord.

76.  The supervisor would also (together with Kwok) attend fortnightly meetings with Hongkong Land.  Choy attended these meetings until June 2007.  From July 2007 onwards KL Ho attended them.  According to the minutes, So also attended these meetings regularly until March 2008.

77.  Later on, another experienced person, Ms Lau Wing Yang, was also sent by the plaintiff to perform supervisory work in relation to Prince’s Building.  Ms Lau and KL Ho together attended the meetings with Hongkong Land from April 2008 onwards. 

78.  The supervisor would also take part in site inspections with Hongkong Land’s building management staff about twice a month, to identify problems and areas which required special attention or action. Kwok would often also attend these inspections.

79.  In addition to the supervisors, Lam gave evidence that the plaintiff also sent some experienced persons to work as foremen in Prince’s Building.  These workers could take a leading position and instruct the other workers what to do.

80.  The defendant does not seriously dispute that these supervisors or foremen did perform their roles and organised the cleaning workers and generally took charge of the day to day operation of the cleaning services at Prince’s Building.  But the defendant says that these individuals were actually put on its payroll and were therefore its employees rather than the plaintiff’s agents.  The plaintiff should not therefore be paid for the work these individuals did.

81.  There is no dispute that these supervisors and foremen did sign employment contracts with the defendant when they first went to work in Prince’s Building.  However, both Choy’s and KL Ho’s evidence is that they would not have gone to work for the defendant but for the fact that they were told by the plaintiff to do so.  I find that the same applied to the other persons sent by the plaintiff.

82.  Moreover, Choy received a salary of $7,000 per month from the defendant (for day shift work), and $6,000 per month from the plaintiff.  Later when he worked night shift at Prince’s Building, he received only $3,000 from the defendant and $13,000 from the plaintiff by way of salary.  Furthermore, while Choy was issued a name card by the defendant, the mobile phone number printed on his name card belonged to the plaintiff.  It was the plaintiff who paid the telephone bills.

83.  Likewise, Lam also signed an employment contract with the defendant, but the monthly salary under that contract was only $5,500.  At that time she received an additional monthly salary from the plaintiff of over $10,000.

84.  In any event, under the agreement between the plaintiff and the defendant, the salaries paid to these supervisors would be deducted as part of the expenses, after the defendant had taken its fixed percentage on the gross fees income, in calculating what was due to the plaintiff.  Those salaries were in effect paid out of what would otherwise be the plaintiff’s income in respect of Prince’s Building.

85.  The supervisors also helped in the recruitment of workers and in keeping records of attendance of the workers.  They passed the data to Lam, who then calculated the amount of wages due to the workers which she recorded in the attendance schedules.  The schedules were passed to Kwok for his review.

86.  According to the unchallenged evidence of the three contractors and the documentary evidence in the form of invoices and ledgers, Lam also, on behalf of the plaintiff, engaged other contractors to perform cleaning services at Prince’s Building.  These include Shing Fung (for vehicles for external wall cleaning), Chuen Kee (for garbage trucks), Hang Lee Cleaning Services (for marble restoration).  Invoices were issued by these contractors to the plaintiff and paid by the plaintiff.

87.  There were also invoices issued by a sub-contractor called New Century Cleaning Service Company to the plaintiff for garbage truck service fees from 16 August 2008 to the end of November 2008, at $5,400 per month.  This coincided with Kwok’s evidence that, at the request of Hongkong Land, the defendant had to increase the frequency of garbage removal from Prince’s Building from once a day to twice a day starting from 16 August 2008.  The invoices show that this enhanced service was provided by the plaintiff via a sub-contractor.

Island Place

88.  The arrangement at Island Place with respect to general cleaning work was different.  The plaintiff sub-contracted the general cleaning services to a company called Today Cleaning.  Today Cleaning was therefore responsible for organising and supervising the workforce, perhaps also through supervisors seconded to the defendant.

89.  Today Cleaning issued invoices to the plaintiff for their sub-contract fees.  Numerous invoices issued by Today Cleaning to the plaintiff for monthly “sub-contract fees” up to October 2008 in respect of Island Place were put in evidence.  Those fees ranged from the lowest of $1,173 (for June 2007) to the highest of $52,241.60 (for February 2007).  There is no suggestion from the defendant that these invoices were false or fabricated documents.

90.  The plaintiff also engaged Chuen Kee to provide garbage trucks for the removal of garbage from Island Place and Shing Fung to provide vehicles for cleaning external walls there.  There were numerous invoices issued by Chuen Kee to the plaintiff up to November 2008 for the relevant fees and at least one invoice from Shing Fung (dated 29 January 2007) that related in part to Island Place.

91.  Moreover, the plaintiff has already paid the various sub-contractors such as Today Cleaning, Shing Fung, Chuen Kee and New Century Cleaning Service Company for the services they rendered in Prince’s Building and Island Place up to November 2008.  The defendant, however, has not paid the plaintiff’s invoices for the months after June 2008.

(3)  Statements and Invoices

92.  I move on to set out the arrangements relating to the monthly statements sent by So, and later by Kwok, to the plaintiff and the monthly invoices sent by the plaintiff to the defendant.  I shall divide my findings into two periods: the time when So was handling the arrangements and the subsequent period when Kwok handled them.

The practice when So was in office

93.  There is clear evidence that So wrote out monthly statements and faxed them to the plaintiff every month.  These statements set out:

(1)     the income relating to the building in question, comprising the fixed sum of fees under the main contract, ad hoc income for “one-off jobs” (such as cleaning of external walls for a particular tenant), and income for specific cleaning work ordered by individual tenants;

(2)     the expenses including wages, mandatory provident fund payments, depreciation of machinery and equipment, material cost, workers uniform, insurance and miscellaneous expenses;

(3)     the defendant’s income or profit, calculated at 8% or 13.4% of the gross income, as the case may be; and

(4)     the amount payable to the plaintiff, being the total income less total expenditure and less the defendant’s income.

94.  In the first few months of 2007, So also faxed a sheet together with the statement to the plaintiff containing a breakdown for the plaintiff’s invoice.

95.  For example, the handwritten monthly statement for January 2007 in respect of Prince’s Building, which showed that $83,000 was due to the plaintiff, was accompanied by a handwritten sheet stating the breakdown as follows:

“1) To provide trucks & labour to collect all rubbish

Charge: HK$15,000

2) To provide a crystallisation service

Charge: HK$34,000

3) To provide tools, materials & toiletries for the centre

Charge: HK$20,000

4) To provide labour & material for the periodical job

Charge: HK$14,000

The total charge: HK$(15,000 + 34,000 +20,000 + 14,000)

= HK$83,000”

96.  After receiving the monthly statement and this breakdown, Lam prepared and issued an invoice from the plaintiff to the defendant using the same breakdown.

97.  The plaintiff’s invoices were verified by Dick So, who countersigned them.  The defendant paid the invoices by cheques signed by Dick So and one of Tsui and Wan.

The practice when Kwok handled the arrangements

98.  With the departure of Tsui and Wan from the defendant, So seldom went to office after January 2008.  In January 2008, when So was fading out from the defendant, he arranged a handover meeting among himself, Kwok and Lam. 

99.  At the meeting which took place in Central, Kwok admitted he learnt that Lam was a representative of the plaintiff company, he got her business card, and So told him that the plaintiff was “working for the defendant” in relation to Prince’s Building and Island Place.  He learnt that the plaintiff was to be paid by the defendant on a monthly basis.  He was informed of the way in which the sums payable to the plaintiff should be arrived at (ie in the way described in paragraph 93 above), including the percentages of the gross income that the defendant would retain for itself (ie 13.4% for Island Place, 8% for Prince’s Building).

100.  The statements for January 2008 onwards were typed up by Kwok and faxed to Lam.  They followed the format of the previous statements handwritten by So and the formula of which Kwok was informed.  In the first few months’ statements in 2008, the amounts to be retained by the defendant and the amounts due to the plaintiff were not typewritten but handwritten (and it is not clear who wrote them), but from the statements for June 2008 onwards, everything in the statement was typewritten by Kwok.

101.  As mentioned in paragraph 65 above, in the statements prepared by Kwok in respect of Prince’s Building from February 2008 onwards, and in respect of Island Place, from July 2008 onwards, the defendant deducted 30% of the fees for one-off jobs, instead of 8% and 13.4%.  Why this change occurred was not explored in evidence, but there is no dispute that Kwok did the calculations and prepared the statements.

102.  Kwok continued preparing and faxing such statements to the plaintiff until the statements for October 2008, which were faxed to the plaintiff on 14 November 2008.  In one of these statements, namely the Island Place statement for July 2008, Kwok added a note at the bottom, no doubt for the plaintiff’s information, as follows:

“Because of the re-decoration of the Chinese restaurant in April 08, only 6 days were worked for collection of rubbish. The charge should be $1924, but April invoice had charged the full sum of $7,060. Therefore the July invoice only charged $1,924.

Swires informed that the food court would under major renovations in September.  The food court manpower would cease for about 2 months.”

103.  During the period of time when the arrangements were handled by Kwok, Lam followed previous practice after receipt of the statements and prepared invoices which divided the total sums charged into four or five items.  The invoices were then sent to the defendant.  Kwok signed and verified the plaintiff’s invoices, which were then paid by the defendant by cheque.  As described in paragraph 115 below, this procedure continued up to the last payment made on 13 October 2008 (for the June 2008 invoices).

104.  The above was uncontroversial and mostly supported by documentary evidence.  It also shows that Kwok, the responsible person from early 2008 onwards, carried on implementing the agreements with the plaintiff without interruption.  Kwok, who was acting on behalf of the defendant, was not being deceived or defrauded in any way.  I do not accept Kwok’s claim that he knew very little about the arrangements and that he was simply following So’s instructions. 

105.  Clearly Kwok was a senior figure in the defendant and it was well known that So was fading out and Brewster would take over management of operations.  For many months in 2008, after the handover meeting, Kwok prepared the monthly statements, sent them to the plaintiff, checked and approved the invoices of the plaintiff, and signed the cheques to the plaintiff (as to which see paragraph 115 below).  He also went to the sites and attended meetings together with the supervisors with the landlords’ building management staff.  He would have had a fairly clear idea of the plaintiff’s role.

106.  Not surprisingly, Kwok was asked at trial what he thought the plaintiff had done which entitled it to payment by the defendant.  He said he believed the plaintiff “had done something” though he was not clear what.  He also said it was “possible” that the plaintiff arranged for garbage trucks and vehicles for cleaning external walls, because he did not himself make arrangements for these two matters.  I do not think he was being frank about his knowledge.  Kwok, with his experience and knowledge of actual operations, must have known these services alone did not cost the amount of money which he himself stated in the statements as being payable and which the defendant actually paid to the plaintiff.

107.  I reject Kwok’s evidence in so far as he claimed he did not know the plaintiff was a sub-contractor of the defendant.  I find that he knew the plaintiff was the defendant’s sub-contractor for general cleaning work in Prince’s Building and Island Place.  In that knowledge he continued the arrangements with regard to monthly statement, invoice and payment.  I am also satisfied that in doing so, he had no intention to defraud the defendant and did not think the defendant was being defrauded by the plaintiff.  Kwok would not have continued the arrangement without so much as asking a question if he was not satisfied there was nothing fraudulent about it.

108.  Counsel for the defendant contends that the plaintiff’s invoices, in particular the breakdowns, were fictitious.  For example, in relation to the breakdown of the invoice quoted in paragraph 95 above, the total sum payable to the plaintiff was in fact arrived at by deducting various sums from the gross income, rather than by adding up the individual components of that breakdown. 

109.  However, it seems to me that the breakdown is only an apportionment of the aggregate amount due to the plaintiff as between different items.  Moreover, So and Kwok knew very well how the monthly sum payable to the plaintiff was calculated.  Kwok verified and approved the invoices.  He also explained to Brewster how the sums payable to the plaintiff were calculated.  They signed the cheques to the plaintiff for those sums.  They were not in any way deceived by the invoices.  In fact, no one from the defendant gave evidence that he or she had been deceived by the invoices.

110.  In these circumstances, taken together with the rest of the evidence, the fact that the invoices contained an artificial breakdown does not in my view establish any fraudulent scheme.  There is no dispute that the total sum of each invoice followed the monthly statement issued by So and later by Kwok and was calculated in accordance with the agreed formula.

(4)     Termination of the Arrangements

111.  By mid-2008, Brewster had fully replaced So and taken up responsibility for the management of the operations at all the sites for which the defendant was the cleaning company.

112.  Both Brewster and Kwok said that Brewster raised some questions with Kwok about the plaintiff’s invoices and decided and instructed the staff to stop further payment to the plaintiff.  (In oral evidence Brewster said this occurred in May 2008.  Kwok said it was in August 2008 that Brewster raised questions about the plaintiff’s invoices.  Kwok at first said he could not recall when Brewster gave instructions to stop payment of those invoices, but eventually he said that it was also in August 2008 that Brewster did so.)

113.  It is however notable that three things went on, which cast doubt on Brewster’s and Kwok’s evidence in this regard.  First, Kwok continued to send monthly statements to the plaintiff, specifying the amounts due to the plaintiff according to the formula, all the way until 14 November 2008 (see paragraph 102 above).

114.  Secondly, Kwok continued to verify and endorse the plaintiff’s invoices (except those for November 2008). 

115.  Thirdly, even after August 2008, the defendant had issued four cheques (which, Brewster accepted, were signed on the dates written on them) to pay the plaintiff’s invoices.

(1)     The plaintiff’s two invoices for April 2008 were paid by the defendant on about 12 August 2008 with a single cheque for $141,000 signed by Brewster and Benny Chan (the defendant’s Financial Controller).

(2)     The plaintiff’s invoices for May 2008 were paid by the defendant on about 18 September 2008 with a single cheque for $126,100 also signed by Brewster and Benny Chan. 

(3)     The plaintiff’s invoices for June 2008 were paid by the defendant by two separate cheques for $60,300 and $72,300 respectively both dated 13 October 2008 and signed by Brewster and Kwok.

116.  It appears that upon making these payments, the defendant also provided its own payment vouchers relating thereto for the plaintiff to verify.

117.  These steps seem to me to throw considerable doubt on Brewster’s and Kwok’s evidence.  Brewster said the cheques should not have been issued, and they had gone out because of an oversight.  I do not accept that evidence.  If the arrangements with the plaintiff, which Kwok had already explained to Brewster at the latest by August 2008, were so lacking in commercial sense and so smacking of a fraud on the defendant that Brewster had ordered a stop to it, it is very surprising that the cheques could still have gone out by an “oversight”.

118.  Kwok said he continued to prepare and fax monthly statements to the plaintiff well after August 2008 because he thought the plaintiff had arranged for some work to be done.

119.  When asked why he continued to verify the plaintiff’s invoices after August 2008 and to approve them for payment, Kwok said he believed the plaintiff “had done something” though he was not clear what.  As stated in paragraphs 104 to 107 above, I do not accept that evidence. 

120.  Kwok also said he continued to follow the practice because So had told him to do so.  However, on Kwok’s own evidence, So had not returned to the office since January 2008.  Brewster had taken over all his responsibilities.  So had resigned and ceased to occupy any position by the beginning of September 2008.  I reject the suggestion that Kwok knew little about the plaintiff’s role and was simply following directions of So in carrying on the arrangements even after August 2008.

121.  In cross-examination, Kwok refused to acknowledge that by verifying the plaintiff’s invoices he was verifying that the plaintiff had done work.  He had difficulty however explaining what he was in fact doing by “verifying” the invoices.  He had even greater difficulty in explaining why he signed the cheques to the plaintiff well after August 2008. When asked in cross-examination, after a very long pause, he said the defendant might have already started taking steps to process the payment in August and the cheques were issued later (even though he admitted such processing would generally only take ten days).  I do not accept that evidence which appears to me to be speculative and inherently improbable.

122.  There is also evidence from Lam and Choy that as late as 10 November 2008, at a meeting which Kwok requested, he told them that the defendant would make payment of the plaintiff’s outstanding invoices but “the foreigner needed a bit more time”. Lam and Choy understood, correctly in my view, that by “foreigner”, Kwok was referring to Brewster.  Neither Lam nor Choy was challenged in cross-examination in relation to this meeting.  When Kwok was cross-examined, he said he probably did not say that.  But in my view his answer carries no conviction.  I find that Kwok did have that conversation with Lam and Choy as testified by them.

123.  I find that there was no instruction issued within the defendant from August up to mid November 2008 to stop payment to the plaintiff.  I reject the evidence of Kwok and Brewster in this respect.

124.  On 18 November 2008, Haldanes, acting for the plaintiff, wrote to the defendant and demanded payment of the outstanding invoices.  Thereafter the plaintiff took vigorous steps to pursue payment including serving a statutory demand and apparently sending letters to the landlords.  While I am not to be taken to approve these tactics, they do not in my view cast doubt on the genuineness of the agreements between the plaintiff and the defendant.

125.  I accept the evidence of Lam that the plaintiff continued to perform the agreement until the end of November 2008.  There is no dispute that whatever the arrangements had been, they were terminated after November 2008.

Conclusion

126.  It is well established that to find a fraudulent scheme such as that allegedly practised on the defendant, very cogent evidence is needed.  On the available evidence, I am far from satisfied that there was any fraudulent scheme involved to siphon money out of the defendant.

127.  In my judgment, subject to the further matters discussed below, the plaintiff has satisfied the burden to prove, on a balance of probabilities, that there were in fact the agreements claimed and that the plaintiff had performed its part up to November 2008.

F.  AUTHORITY

128.  Despite that the defendant (acting by two authorised signatories) had issued cheques to settle the plaintiff’s invoices in respect of some 18 months (from January 2007 to June 2008), it contends that the agreements were not binding because they were entered into by So without its authority.

(1)     Actual authority

129.  The plaintiff accepts that it bears the burden of establishing that the agreements were entered into by So on behalf of the defendant with the requisite authority, and that the question of authority, as opposed to ratification, is to be determined with reference to the facts as at the time the agreements were entered into. 

130.  The plaintiff contends that So had both actual and apparent authority to enter into the agreements in question. 

131.  The question of actual authority seems to me to have two aspects: first, whether So as Operations Director of the defendant had implied actual authority to enter into the agreements, and, secondly, whether either or both of Tsui and Wan authorised So to do so and, if so, whether they in turn had authority.

Implied actual authority of So as Operations Director

132.  A person may have actual authority by reason of his appointment to a particular managerial post by the principal.  He will have express authority to do things which, for example, his letter of appointment specifically sets out as being within his powers and duties.

133.  In addition, when a person is appointed to an office, he is also impliedly authorised “to do all such things as fall within the usual scope of that office”: Hely-Hutchinson v Brayhead [1968] 1 QB 549, 583B-C.  This is often called “usual authority”.  Whether there is such authority turns on the ordinary scope of the person’s employment and duties, subject to any express restriction imposed by the principal.

134.  So was at the time the Operations Director, which ranked just below the three directors of the defendant.  Although no letter of employment of Dick So has been placed in evidence, the scope of his employment and duties can be deduced from other matters.

135.  In this connection, it should be borne in mind that, at the time, given Tsui’s proposal to Tuet and the transfer of 50% of the issued shares in the defendant to Profit Up (see paragraphs 8 to 12 above), it was evident that Tuet was content to leave it to Tsui, with the help of Wan and So, to achieve the “aggressive” target revenue of HK$100 million over three years.  So was not a mere employee but also the representative of Profit Up, a 50% shareholder of the defendant who had undertaken to expand the volume of business substantially.  It is only natural that such a business partner would have to be given a fairly free hand.  Tuet himself admitted that Profit Up “had a say” as to how the defendant should be operated.

136.  Kwok’s evidence was that So was “responsible for the management issues” in all the work sites of the defendant.  In relation to Island Place and Prince’s Building, Kwok said that “[a]ll liaisons with subcontractors were performed by Dick So personally”.  After So left, Brewster said he was appointed to take over “the management of the operations in all working sites” of the defendant.  In his statement, Kwok said that it was well known within the company by early 2008 that Brewster “would eventually take over the management of the operations from Dick So”.

137.  Further, in the defendant’s response to the plaintiff’s first letter of demand, signed by Brewster and dated 27 November 2008, the defendant stated:

“We respectfully request you speak with Mr So Kwok Hung regarding the claims by News Cleaning Services Limited as he was the Operations Director in charge and was fully responsible regarding the aforementioned matter at the time”.

Thus the suggestion then was that So was fully responsible, not that he had no authority to represent the defendant.

138.  In fact, So and his subordinate, Kwok, signed on behalf of the defendant the main contract with Hongkong Land in relation to Prince’s Building.  So also signed the tender for Island Place in December 2007 for the two years of 2008 and 2009.  No board resolution of the defendant had been disclosed that would indicate that So required any specific authorisation to sign these documents.

139.  These matters suggest that So had full responsibility over the management of the operations.  That seems to me to include making arrangements with subcontractors to perform any part of the work.  Indeed it became clear in Kwok’s oral evidence that even he himself, as Operations Manager and a subordinate of So, had authority to commission sub-contractors.

140.  The defendant asserts that board approval was required for sub-contracting.  I reject that contention, which is not supported by any documentation and is contradicted by the other evidence.  Even Tuet’s own evidence (which I do not accept on this point) was that one director’s verbal approval was sufficient. 

141.  The defendant also argues that if So had authority to sub-contract, it only applied to permissible sub-contracting such as for special tasks, examples of which are provision of garbage trucks and cleaning of external walls, and not to sub-contracting of the whole job.  I do not accept this contention. 

142.  The defendant’s evidence in this respect is unsatisfactory.  Tuet said in his statement that sub-contracting of core cleaning works is “rare (if not never done)”.  He did not say it was prohibited within the defendant.  I find that there was no such express prohibition of sub-contracting of general cleaning work.  Tuet said he had a “golden rule”: if it came to his knowledge that the sub-contracting fees exceeded 5%, the relevant portfolios had to be looked into.  This might be his personal belief, but neither Kwok nor Brewster had ever heard of it.  Kwok said a previous director, Mr Leung, had said that if sub-contracting fees exceeded HK$10,000 then he needed to be informed, but that was Leung’s practice and related to an earlier period.  By 2006, the defendant had been restructured, with Tsui as Chief Executive Officer and Wan as Chief Operating Officer and So running the operations, and with Profit Up having promised to achieve the target of HK$100 million revenue in three years.  Leung was no longer there and Tuet had very much taken a “hands off” approach.  On the evidence, I find that there was no relevant limit placed on So’s authority to sub-contract the cleaning contracts obtained by the defendant.

143.  It is, in my judgment, a fair inference that responsibility for all management issues of the work sites including in particular the question of sub-contracting was within the scope of employment and duties of So, and that he had actual authority to deal with that matter at all times until his duties were taken over by Brewster.

Actual authority stemming from Tsui and Wan

144.  For completeness, I discuss the position assuming that So’s own appointment as Operations Director did not carry with it the actual authority to enter into the agreements in question.  The issue is whether it is to be inferred that Tsui and Wan authorised him and if so whether Tsui and Wan had actual authority.

145.  The directors of the defendant at the time up to August 2007 were Tuet, Tsui and Wan.  Tuet was the Chairman of the ESG group. He sat at the helm of over 40 companies.  He was, in his own words, “not actively involved in the daily operations of [the defendant]”.  He concerned himself with the big picture.  At the material times he was also busy with obtaining the cleaning contracts for the Beijing Olympics 2008.

146.  In contrast, Tsui was the Chief Executive Officer and Wan was the Chief Operating Officer of the group as well as the defendant.  As such, I have no doubt that they had the requisite authority within the company to authorise the agreements with the plaintiff.

147.  Moreover, I think it is to be inferred, on the balance of probabilities, that Tsui and Wan knew and consented to the arrangements with the plaintiff, and that So entered into the agreements with the plaintiff with their approval.  In drawing such an inference, I need not be satisfied that the matters to be inferred are the only possible explanation, but that they are probable.  As stated in Bradshaw v McEwans Pty Ltd (HC of Aust., unreported, 27 April 1951) (quoted with approval in Jones v Dunkel (1958-1959) 101 CLR 298 at 310):

“All that is necessary is that according to the course of common experience the more probable inference from the circumstances that sufficiently appear by evidence or admission, left unexplained, should be that the injury arose from the defendant’s negligence. By more probable is meant no more than that upon a balance of probabilities such an inference might reasonably be considered to have some greater degree of likelihood.”

148.  The matters that support that inference include the following:

(1)  On the evidence, So was brought into the defendant by Tsui and Wan.  As Operations Director, So reported to them. Soon after they left the defendant (in January 2008), So ceased in effect to perform his duties, and eventually resigned in September 2008.  The three of them appear very much to have been a team.

(2)  The fees paid to the plaintiffs by the defendant pursuant to the agreements were paid by cheques.  All the cheques drawn in favour of the plaintiff between November 2006 and November 2007 were signed by two persons, namely, So and either Tsui or Wan.  (There are no records available of the cheques drawn in payment for services for the period from November 2007 to March 2008.)  It is likely that Tsui and Wan knew of and endorsed the underlying transactions.

(3)  Neither Tsui nor Wan was called by the defendant to give evidence.  Given that So reported to them, and they signed the cheques, this omission is surprising in circumstances where the defendant contends that the agreements were entered into without authority.  Nor is there any credible explanation of the failure to call them.  Counsel for the defendant asserted in closing submissions that Tsui and Wan were in Mainland China and could not be located.  But there is no evidence to that effect. During opening submissions counsel had said he intended to lead evidence from Tuet about the involvement of Tsui and Wan.  I indicated I would be reluctant to allow wide-ranging supplemental evidence-in-chief in the guise of a “top up” and asked that any further evidence should first be reduced into writing in the form of a supplemental statement so that the plaintiff could make an informed decision whether to oppose the granting of leave for such evidence to be admitted.  In the event, no supplemental statement was put forward, and no oral evidence-in-chief was led from Tuet.  But in cross-examination, Tuet said that after Tsui left the defendant, he had bumped into him once and he had “no quarrel” with Tsui.  Tuet gave no evidence that Tsui and Wan were in Mainland China and could not be located.

(4)  From this, one is entitled to draw the inference that Tsui’s and Wan’s evidence would not have helped the defendant’s case.

(5)  In fact, Tuet’s own inference is that Tsui and Wan were both involved in the acts of So of which the defendant now complains.  Indeed, when Tuet made a report to the Independent Commission against Corruption in relation to the arrangements with the plaintiff, he reported against Tsui and Wan in addition to So.  I think the fact that Tuet, who is intimately familiar with the internal set-up of the defendant, has concluded that Tsui and Wan were privy to So’s acts fortifies the inference that So entered into the sub-contracts in question with their blessing.

(2)  Apparent authority

149.  For completeness, I discuss briefly the question of apparent authority.  It is trite law that apparent authority depends on there being a representation or holding out by the principal.  In Freeman and Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480, 503-504, Diplock LJ said:

“The representation which created ‘apparent’ authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal’s business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal’s business has usually actual authority to enter into.”

150.  Then at page 505, he said:

“The commonest form of representation by a principal creating an ‘apparent’ authority of an agent is by conduct, namely, by permitting the agent to act in the management or conduct of the principal’s business. Thus, if in the case of a company the board of directors who have ‘actual’ authority under the memorandum and articles of association to manage the company’s business permit the agent to act in the management or conduct of the company’s business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorised to do acts of the kind which he is in fact permitted to do usually enters into in the ordinary course of such business. ...”

151.  In the present case, So was appointed as, and held out to be, the Operations Director of the defendant.  As stated in paragraph 136 above, in relation to Island Place and Prince’s Building, the defendant left all liaisons with sub-contractors to be conducted by So in that capacity.  At the time, So was given full responsibility by the defendant for “the management of the operations in all working sites”.  I think that in these circumstances, the defendant should be held to have held So out as having authority to contract with sub-contractors on its behalf.

152.  The defendant submits that nevertheless the plaintiff could not rely on any apparent authority of So for two reasons. First, the plaintiff did not, in entering into the agreements, rely upon any representation that So had authority to do so on behalf of the defendant.  I have some difficulty in understanding this submission.  If what is meant is that there is no express evidence from Ho that he relied on the defendant’s representation in dealing with So, I think the law is not so formalistic as to require a ritual incantation in every case by the third party that he had relied on the holding out by the principal.  As Lord Neuberger of Abbotsbury NPJ said in Thanakharn Kasihorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No. 2) (2010) 13 HKCFAR 479 at para 75:

“In my view, once a third party has established that the alleged agent had apparent authority, i.e. that the principal held out the alleged agent as having authority to bind the principal, and that the third party has entered into a contract with the alleged agent on behalf of the principal, then, in the absence of any evidence or indication to the contrary, it would be an unusual case where reliance was not presumed.”

153.  Secondly, the defendant submits that the plaintiff was put on enquiry at the time of the agreements as to whether So had authority to commit the defendant to those agreements, and that the plaintiff’s avowed belief in So’s authority was dishonest and irrational: see Akai Holdings Ltd (No. 2), supra, at paras 49 to 62.

154.  Principally two matters are relied upon by the defendant for this submission: first, that the sub-contracting would involve a breach of the main contracts with, and is deceptive of, the landlords; secondly, that the arrangements did not make commercial sense.

155.  I have already dealt with the second matter in a different context and need not repeat myself.  I refer to paragraphs 46 to 54 above.  I am not persuaded that it would seem to the plaintiff that the arrangements made no commercial sense from the defendant’s point of view.

156.  Nor does the first matter in my view show that the plaintiff’s belief in So’s authority was dishonest or irrational. 

(1)  In determining whether the plaintiff’s belief in So’s authority was dishonest or irrational, it is necessary to take into account what were actually known to the plaintiff.  As Lord Neuberger NPJ said in Akai Holdings Ltd (No. 2), supra, at para 50, although irrationality “ultimately” involves an objective assessment, turning a blind eye “involves a more subjective exercise” than being put on enquiry.  It is also clear from his judgment (eg para 86) that the facts known to the third party provide the reference point for the inquiry.  To take into account the circumstances known to the third party at the time as well as his personal attributes such as his experience would be consistent with the courts’ approach to dishonesty in the context of dishonest assistance of a breach of trust: see Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, 391B-C.

(2)  As stated in paragraph 49 above, so far as the plaintiff was concerned, there was nothing unusual in the arrangements entered into with the defendant.  Although the main contracts often did not allow sub-contracting without the landlords’ consent, the experience of the plaintiff was that it was often done by cleaning companies nonetheless.

(3)  In fact, the evidence suggests that specialist sub-contractors were often engaged by the main cleaning contractors without express notice to the landlords and without the landlords’ express consent. Kwok admitted that in practice, sub-contracting was not limited to garbage trucks and vehicles for cleaning external walls.

(4)  The agreements were not such that they could not in any way have benefitted the defendant.  As stated in paragraphs 46 to 54 above, there could be commercial benefits in the arrangements from the defendant’s point of view.  At any rate, it was Lam’s and Ho’s evidence, which I accept, that the plaintiff believed that the agreements were for the mutual benefit of both the plaintiff and the defendant, and that the parties were simply entering into a deal at arm’s length according to their own respective needs.

(5)  It is also significant that Kwok himself did not see it as beyond the scope of his duties or dishonest to the defendant to continue implementing the arrangements with the plaintiff even though he clearly knew that the plaintiff was a sub-contractor of the defendant and that neither of the landlords was aware of the involvement of the plaintiff.

(6)  In contrast to the position in Akai Holdings Ltd (No. 2), supra, where Mr Ting was in a position of conflict that was “obvious to any banker” reviewing the credit application (see para 85), there was no perceivable conflict of interests on the part of So in entering into the agreements with the plaintiff.  There is no suggestion, nor was it put to the plaintiff’s witnesses, that So expected to or did obtain any benefit from the plaintiff or from anyone else by entering into the agreements on behalf of the defendant. 

(7)  So far as the plaintiff is concerned, there was nothing in the circumstances at the time to suggest that it was anything other than an honest senior employee trying to make a commercial arrangement for the benefit of his employer, even though it involved concealment of the sub-contracting from the landlords.

(8)  As Lord Keith observed in Armagas Ltd v Mundogas SA [1986] 1 AC 717 at 780A-C, albeit in the different context of vicarious liability, dishonest conduct of an employee “perpetrated with no intention of benefiting the employer” “is of a different character from blundering attempts to promote the employer’s business interests, involving negligent ways of carrying out the employee’s work or excessive zeal and errors of judgment in the performance of it”.

157.   In my view it was not dishonest or irrational on the facts of this case for the plaintiff to believe that So had authority to reach the agreements in question on behalf of the defendant. 

158.  Counsel for the defendant also points to the fact that the plaintiff had not done business with the defendant or So before. That is correct, but this is not a case where the plaintiff had to part with any property or expend great sums or extend substantial credit at the outset on the faith of So’s authority.  Under the agreements, the plaintiff would very shortly send its supervisors to the site to take up the responsibilities.  If So did not in fact have authority and was unable to let the plaintiff perform any work at the site, the plaintiff would not have lost much.  Accordingly I do not think this shows any irrationality on the plaintiff’s part.

G.  COUNTERCLAIM

159.  The defendant counterclaims against the plaintiff for recovery of the sums previously paid to the plaintiff.  The causes of action relied upon are dishonest assistance of breach of fiduciary duty and conspiracy.  I deal with them in turn below. 

(1)  Dishonest Assistance

160.  The breaches of duties are said to be committed by So, whom the defendant has not joined as a party to the counterclaim. 

161.  I am prepared to assume that So owed relevant fiduciary duties to the defendant to act in good faith in its best interests as pleaded in the Amended Defence and Counterclaim.

162.  Counsel for the defendant puts its case of breach of fiduciary duties on the basis that the agreements were unnecessary, brought no benefit to the defendant and simply siphoned off the defendant’s profits without justification.

163.  For the reasons explained above, in discussing whether the agreements existed, I have rejected the inference that the agreements were a scheme to siphon off the defendant’s profits.  In the context of the counterclaim, where the burden of proof lies on the defendant, the position is a fortiori.  I am far from satisfied that there is sufficiently compelling evidence to establish on a preponderance of probability that the agreements were entered into to siphon off the defendant’s profits.

164.  On the basis that the agreements were genuine commercial agreements, even if they turn out to be unwise, that would not be indicative of a breach of fiduciary duty.  This is so even though the agreements resulted in possible breaches of the main contracts with the landlords.  The defendant has failed to prove that So did not honestly believe that his acts were in the interests of the defendant.

165.  That is the end of the claim for dishonest assistance.  For completeness, I should also say that I am also not satisfied there was the requisite dishonesty on the part of the plaintiff.  Mr Lui seeks to rely on an “admission” by Ho of dishonesty, but in the context he was merely frankly accepting in cross-examination that the concealment of the sub-contracting from the landlords might be regarded by others as dishonest.  I do not think that this is the requisite dishonesty in relevant sense.

(2)  Conspiracy

166.  The defendant’s counterclaim of conspiracy is based on much the same factual allegations as its case on dishonest assistance, and therefore falls together.  On my findings, So entered into a genuine commercial agreement on behalf of the defendant, not a conspiracy to injure the defendant.

H.  QUANTUM

167.  The plaintiff’s outstanding invoices are those from July to November 2008.  Their amounts are as follows:

Month (2008)	Prince’s Building Invoice amount (HK$)	Island Place Invoice amount (HK$)
July	61,600	17,400 75,200
August	65,700	69,900
September	62,600	78,000
October	74,200	51,700
November	90,000	48,600

168.  The invoices for July to October 2008 were, first, based on the monthly statements prepared by Kwok and sent to the plaintiff and, secondly, verified by Kwok.  It seems to me that the plaintiff is entitled under the agreements to these outstanding invoice amounts, totalling $556,300.

169.  There were however no statements for November 2008.  Nor were the two invoices for November 2008 verified by Kwok.  The plaintiff has not explained how the two invoice amounts were calculated.  In my judgment, the defendant should be required, in accordance with the agreements, to account for the income and expenditure in respect of November 2008 and pay the amount due to the plaintiff accordingly.  This is not specifically claimed by the plaintiff in the prayer in its Statement of Claim but should in my view be ordered to enable all matters in dispute to be completely and finally determined: s 16(2) of the High Court Ordinance (Cap 4).

I.  CONCLUSION AND ORDERS

170.  For the above reasons, there will be judgment for the plaintiff on its action in the sum of $556,300.  In addition, the defendant is to account for the income and expenditure in respect of November 2008 and pay the plaintiff the amount found due on such account.  There will be interest on these sums at prime rate plus 1% per annum from 1 January 2009.

171.  The defendant’s counterclaim is dismissed.

172.  By way of an order nisi, I award the costs of the action and of the counterclaim to the plaintiff, to be taxed if not agreed.