JOE ZHIXIONG ZHOU v. SAIF PARTNERS II L.P. AND ANOTHER

CACV 62/2018

[2019] HKCA 766

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 62 OF 2018

(ON APPEAL FROM HCCL NO 16 OF 2016)

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J U D G M E N T

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Hon Kwan VP:

A. INTRODUCTION

A1. The judgment, costs ruling and accounts ruling

1.  On 14 February 2018, Deputy High Court Judge Field handed down judgment in a dispute between a private equity fund and one of its former limited partners, Joe Zhixiong Zhou, who is the plaintiff in this action.  The trial had lasted 11 days in January 2018.  He gave judgment for the plaintiff against the 1^st and 2^nd defendants in respect of the plaintiff’s claim for sums due under the provisions of an Amended and Restated Limited Partnership Agreement dated 29 June 2005 (“the ALPA”) and a Separation Agreement dated 11 December 2006 (“the SA”).  As a result, the defendants were ordered to pay the plaintiff the judgment sum of US$22,430,369.66, with pre-judgment interest in the sum of US$6,002,101 plus interest at the judgment rate from the date of judgment until payment.

2.  The judge however found the plaintiff in breach of fiduciary duty in respect of his involvement in the development and commercialisation of a technology known as the Diandao or Point Advertising Technology^[1]. Hence, he ordered the plaintiff to disgorge any profit he made personally as a result of an investment agreement dated 24 August 2007 (“the Xinrui Investment Agreement”) that the plaintiff was involved in acting for a party thereto.  An order was made for all necessary enquiries and accounts be taken to identify such profits made by the plaintiff and liberty was given to the 1^st defendant to seek directions for the taking of such accounts.  All the other heads of counterclaim were dismissed. 

3.  On 25 April 2018, the judge gave his ruling on costs (“the Costs Ruling”). He ordered the defendants to pay the costs of the plaintiff’s claim for sums due under the ALPA and the SA and the costs of the counterclaim for damages down to the point the defendants abandoned this head of the counterclaim a few days before the trial.  In respect of the remaining heads of counterclaim for an account of profits, the judge ordered the plaintiff to pay the defendants 65% of the costs of the account of profits counterclaim.

4.  On 26 June 2018, the judge handed down his ruling on how the taking of an account of the profit made by the plaintiff personally as a result of the Xinrui Investment Agreement should be taken (“the Accounts Ruling”).  He ordered inter alia as follows:

“Upon each of the Defendants each serving on the Plaintiff (“P”) a written undertaking signed by an appropriate senior officer undertaking to keep confidential any documents or other information produced by P by reason of this order and in the case of the First Defendant (“D1”) undertaking to use the said documents only for the purpose of seeking any secret profit made P by reason of the Xinrui investment of 24 August 2007, P must, within 36 days of the date hereof, provide an account duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon of all income, including salary, fees, dividends and other remuneration whether by way of “Capital Distribution” and/or “Carried Interest” or similar payments received by P and/or entities owned and/or controlled by P down to 31 December 2012 (“the end date”) from (i) KPCB-CF and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”)…”.

A2. The plaintiff’s appeal and the defendants’ cross-appeal

5.  The plaintiff’s appeal is against the judgment, the Accounts Ruling and the Costs Ruling.

6.  In respect of the judgment, the plaintiff seeks to challenge the decision on the counterclaim.  The most important contentions are two: (1) the judge erred in law in holding that the plaintiff owed fiduciary duties to the 1^st defendant; and (2) the absence of jurisdiction to enter judgment against the plaintiff on the counterclaim “(a) in favour of unidentified non-parties; (b) in respect of unpleaded substantive claims that had never been tried; (c) for reflective rights or entitlements of non-parties; and (d) which … the defendants and their affiliated non-parties chose not to advance in the Action below”^[2]. Mr Barlow SC^[3] submitted on the plaintiff’s behalf that if he succeeds on either contention, that will decide both the plaintiff’s appeal against the judgment and the defendant’s cross-appeal.

7.  As regards the Accounts Ruling, the plaintiff’s contention is that that part of the order as quoted above is wrong in law because the judge had become functus officio when he made it, and it required disclosure of wide-ranging commercially sensitive information that was outwith the original decision on the counterclaim.  Further, the order exceeded the permissible bounds for an order to account.

8.  The Costs Ruling is attacked on the basis that the costs order is “perverse and incorrect”.

9.  The defendants’ cross-appeal seeks to challenge the judgment on the plaintiff’s claim.  Three main points were taken by Mr Manzoni SC^[4]. The first two relate to the proper construction of relevant clauses in the ALPA (“the proviso (iv) point”) and the SA (“the clause 8 point”).  The third point is that the judge should have held that the plaintiff was obliged to disclose his breaches of duty to the defendants prior to entering into the SA or upon commencement of his breaches and by not so disclosing was guilty of an implied misrepresentation that there was no wrongdoing to disclose.  The defendants are therefore entitled to rescind the SA, alternatively to recover damages against the plaintiff the net effect of which is to extinguish the plaintiff’s claim in its entirety (“the misrepresentation point”).

B. BACKGROUND

B1. The parties and the private equity fund structure

10.  “SAIF Partners” is a group of entities trading under that name. SAIF Partners is not a legal entity.  It provides growth capital to companies in Asia, with particular focus on growth-oriented investments in information technology, internet, mobile, consumer products and services, healthcare, clean technology, education, modern agriculture, financial services and manufacturing, especially in China, India and South Korea. The focus of its investments is to provide funding to growth stage companies and to assist in their expansion.  SAIF Partners will then exit the investment at a suitable time.  The majority of the funding of SAIF Partners comes from external investors.

11.  The managing partner of SAIF Partners is Andrew Y Yan (“Mr Yan”).  He established the first private equity fund, SoftBank Asia Infrastructure Fund LP (“Fund I”), in 2001 and the second one, SB Asia Investment Fund II LP (“Fund II”), in 2004.  It is the investments of Fund II that feature in this litigation.

12.  Fund II is an exempted limited partnership registered under the Exempted Limited Partnership Law (2003 Revision) of the Cayman Islands and any successor to such statute (“the ELP Law”).  Under the ELP Law, an exempted limited partnership consists of general partners and limited partners.  A general partner is liable for all debts and obligations of the partnership in the event that the assets of the partnership are inadequate, may hold assets of the partnership and conduct business for the partnership including the incurring of debts and the making of contracts and transactions.  A limited partner is not liable for the debts and obligations of the partnership save as provided in the partnership agreement and shall not take part in the conduct of business of the partnership^[5].

13.  The general partner of Fund II is SAIF II GP LP (“the Fund General Partner”).  The limited partners are external investors who are mainly institutional investors.  Their relationship is governed by a partnership agreement referred to in the judgment as “the Fund II LPA”. The limited partners provided almost all of the capital for investments but do not take part in the management or control of Fund II.  Fund II has no direct operations; it maintains interests in a variety of portfolio companies with underlying businesses.

14.  The Fund General Partner is structured in a similar way.  It is also a Cayman Islands exempted limited partnership.  Its general partner is SAIF Partners II LP, the 1^st defendant in this action.  Its limited partner is an external investor Cisco Systems, Inc, whose investments in Fund II are channelled through a Cayman Islands limited liability company SB Asia Pacific Investments Ltd.  The relationship of the partners is governed by a partnership agreement referred to in the judgment as “the SAIF II GP LPA”.  As the limited partner, Cisco Systems, Inc and SB Asia Pacific Investments Ltd do not hold management control over the Fund General Partner.

15.  The last level in the fund structure is the 1^st defendant.  Like the other general partners mentioned above, it is a Cayman Islands exempted limited partnership.  Its general partner is the 2^nd defendant, SAIF II GP Capital Ltd.  The 2^nd defendant is a Cayman Islands exempted limited liability company.  The sole shareholder and director of the 2^nd defendant is Mr Yan.  At all material times, the limited partners of the 1^st defendant were the plaintiff and other key investment professionals.  The partnership relationship is governed by the ALPA.  The 1^st defendant served as a conduit through which the investment professionals made their investments in Fund II, as there is a committed capital contribution to the 1^st defendant under the ALPA.  This action is concerned with the rights and obligations of the plaintiff in the partnership which is the 1^st defendant.

16.  I annex to this judgment a diagram showing the fund structure described above.  It is Mr Yan who controlled the 1^st defendant, the 2^nd defendant, and the operations of Fund II.  The structure adopted is common to fund management equity, with due regard to international taxation and regulatory considerations.

17.  Under the Fund II LPA, Fund II must pay an annual management fee of 2% of the total committed capital of Fund II (in the first five years) or 2% of the remaining assets of Fund II (in the later five years) to SAIF Management II Ltd (“the Fund Manager”).  In addition, Fund II must pay 20% of the profits realised on Fund II’s investments to the Fund General Partner.  These will then be passed on by the Fund General Partner to the 1^st defendant in accordance with the terms of the SAIF II GP LPA.

18.  Under the terms of the ALPA, the 20% of the profits realised on Fund II’s investments passed on to the 1^st defendant from the Fund General Partner will be divided up among the general partner (ie the 2^nd defendant) and the limited partners (including the plaintiff).  The portion of the return attributable to the capital in Fund II and other non‑carry distributions will be distributed among the 2^nd defendant and the limited partners in proportion to their respective aggregate capital contribution.  The portion of the return attributable to “Carried Interest”^[6] will be distributed among the limited partners according to their points allocation based on a points pool of 10,000 points, each point being equivalent to 0.01% of the 1^st defendant’s profits, with the limited partner’s entitlement vesting over a six-year period.  The plaintiff’s points allocation under the ALPA was 1659/10,000, i.e. 16.59% of the 1^st defendant’s profits.

B2. The plaintiff’s role and activities

19.  In or about 2001, the plaintiff was employed as an investment officer with Fund I.  In this connection, Sunstep Co Ltd (“Sunstep”) entered into a consulting services agreement with the plaintiff on 1 January 2002 (to cover offshore activities outside China) and SAIF Advisors (Beijing) Limited (“SAIF BJ”) entered into an employment contract with him on 26 November 2002 (to cover onshore activities in China).  The plaintiff was a salaried employee of SAIF BJ and a fee‑earning consultant of Sunstep.  SAIF BJ and Sunstep were affiliates of the Fund Manager and the 1^st defendant.

20.  When Fund II was set up in 2004, the plaintiff was invited by Mr Yan to become a limited partner of the 1^st defendant.  He was one of the six investment professionals promoted to the level of partner by Mr Yan. He agreed and signed the partnership agreement in December 2004, which was amended in June 2005 and became the ALPA.

21.  Following the execution of the partnership agreement, the plaintiff was designated a “Principal Limited Partner”^[7] and a “Core Principal”^[8].  He had responsibility, together with the other limited partners and Mr Yan, for the investment activity of Fund II.  The Principal Limited Partners were drawn from SAIF Partners’ most senior and high ranking professional staff.  The plaintiff was a member of the Investment Committee^[9] that decided which investments proposed by individual limited partners should be taken up as Fund II investments.

22.  The plaintiff was also designated a “Principal” under the Fund II LPA.  Under the Fund II LPA, the Fund General Partner shall cause each Principal to devote substantially all of their business time and efforts to the investment and other activities of Fund II and any related investment funds, and, after the Full Investment Date, to devote such time as is reasonably necessary to conduct the investment and other activities of Fund II and the related investment funds in a prudent and thorough manner^[10].

23.  Under article 3.1 of the ALPA, each Principal Limited Partner covenanted that he shall devote substantially all of his business time and efforts to the investment and other activities of the 1^st defendant, the Fund General Partner, Fund II and the existing funds, except as otherwise agreed to by the 2^nd defendant.  Further, each Principal Limited Partner shall refer all investment opportunities that are suitable for Fund II to the 1^st defendant.

24.  Under article 3.2, which is headed “Non-Interference Covenants”, each Limited Partner and Principal Limited Partner covenanted inter alia as follows:

“(a) Non-Solicitation. Each Limited Partner (while such Limited Partner is employed by the Partnership, the Fund General Partner, the Fund, the Fund Manager or their respective Affiliates or is a Limited Partner and for twelve months thereafter or such other period as is expressly agreed by the General Partner in writing), shall not (and shall cause such Limited Partner’s Affiliates not to): … (ii) solicit or encourage any other employee of the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates to cease providing services to the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates or breach any restrictive covenant between the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates and such Person.

(b) Confidentiality. Each Limited Partner shall (and shall cause such Limited Partner’s Affiliates to) keep confidential and not, without the prior written consent of the General Partner, disclose or use for his, her or its own benefit any information with respect to this Agreement, the Partnership, the General Partner, the Fund General Partner, the Fund Manager, the Fund, any Portfolio Company (or any predecessor thereto) or any of their respective Affiliates, or any information deemed confidential or proprietary pursuant to any agreement or policy of the Partnership, including, but not limited to, information relating to the Fund’s financial performance results, rates of return (i.e., track record of the Fund or any of the Portfolio Investments), trade secrets or the systems, formulae, analyses, business models and other material ideas developed and reduced to tangible form by or on behalf of the Partnership, the General Partner, the Fund General Partner, the Fund Manager, the Fund, any Portfolio Company (or any predecessor thereto) or any of their respective Affiliates (including by any Partner). …

(c) Non-Competition. Each Principal Limited Partner (while such Principal Limited Partner is employed by the Partnership, the Fund General Partner, the Fund, the Fund Manager or their respective Affiliates and for six months thereafter or such other period as is expressly agreed by the General Partner in writing) shall not (and shall cause such Principal Limited Partner’s Affiliates not to), unless the General Partner has expressly agreed otherwise in writing, become engaged or associated with any entity, whether as a principal, partner, employee, consultant, service provider, shareholder or otherwise (other than as a holder of not in excess of 1% of the outstanding voting shares of any publicly traded company), that is (at the time of such termination) or becomes (within the six months thereafter or such other period as is expressly agreed by the General Partner in writing) engaged in any geographic area in any business (including any private equity fund or similar investment vehicle) that is in competition with the business of the Partnership, the Fund General Partner, the Fund, the Fund Manager, any Portfolio Company or their respective Affiliates.

(d) Non-Disparagement.  Each Limited Partner shall not (and shall cause such Limited Partner’s Affiliates not to) disclose to the public or any other Person any false or misleading information concerning, or any information that reflects negatively upon or otherwise disparages, the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund, or any Portfolio Company, or any of their respective Affiliates or their operations.  Each Limited Partner shall not (and shall cause such Limited Partner’s Affiliates not to) conduct himself, herself or itself in a manner adversely affecting the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates, except to the extent necessary in order to comply with any law, order, regulation or ruling applicable to such party (or their respective Affiliates), the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates.” 

25.  As a Principal Limited Partner, until around August 2006, the plaintiff was involved in, inter alia, identifying potential investment opportunities for Fund II, obtaining the approval of the Investment Committee to go ahead with such opportunities, negotiating the terms of the approved investments and supervising the investments once a transaction had been completed, which often meant serving on the board of the relevant portfolio company in whose share capital Fund II had invested.  By mid-2006, the plaintiff was serving on the boards of 14 portfolio companies, of which ten belonged to Fund II.

26.  The plaintiff received income from SAIF Partners in at least three ways: remuneration in his capacity as a salaried employee and a fee‑earning consultant of the Fund Manager’s affiliates (which in turn derived their income through management fees paid by Fund II); distribution based on investment return on his capital contribution under the ALPA; and Carried Interest under the ALPA derived from the return on Fund II’s investments.

B3. Fund II’s investment in Show World

27.  In about October 2015, the plaintiff identified a technology company in the PRC as a potential investment opportunity for Fund II.  This was Show World Information Technology Co Ltd (“Show World”) that had been established by Zhou Yang.  The plaintiff and his deal team (Yanchao Zhao (“Mr Zhao”) and Lynda Lau (“Ms Lau”)) produced a “Concept Paper” on Show World in December 2005, for distribution to other “Partners and Professionals”.  It stated that Show World was the dominant player in both avatar^[11] and Colour Call^[12] business in China and had a strong technology barrier of entry.

28.  In early 2006, the plaintiff laid before the Investment Committee an Investment Report on Show World, which covered much of the ground in the Concept Paper.  In addition, it stated that SAIF was considering investing US$8 million for 4,210,526 Series A Preferred Shares (about 29.31% of the ownership of the company post-closing) and US$2 million of warrants for 877,193 Series A shares at 120% of Series A initial pre-money valuation.  There would be ratchet terms with a target of earnings of US$3 million as shown in the financial statements for 2006.

29.  In February 2006, the Investment Committee agreed to invest US$8 million in Show World in two tranches.  The structure used involved the incorporation of a Cayman Islands company, My Show Group Limited (“My Show”), which then established a wholly owned foreign enterprise incorporated in the PRC called Beijing Show World Science and Technology Co Ltd (“the WOFE”).

30.  On 5 April 2006, My Show, Fund II, Zhou Yang and Show World executed a share purchase agreement (“the My Show SPA”) by which it was agreed that: (1) Fund II would acquire 2,631,579 Series A Preferred Shares in My Show at US$5 million and, at a later date would, if certain conditions were met, acquire further shares up to 1,578,947 at US$3 million; (2) subsequent to the execution of the My Show SPA, Zhou Yang, My Show and Show World would effectuate a plan of restructuring involving an asset transfer agreement, under which the WOFE, with Zhou Yang as its general manager, would assume control of substantially all of Show World’s operations and be entitled to receive substantially all of the income generated by Show World; and (3) My Show and Zhou Yang would execute a founder purchase agreement (“the FPA”), under which Zhou Yang was to be issued shares in My Show, if one of two conditions was met; in the event neither condition was met, the parties would use best efforts to agree an alternative means to achieve the FPA, failing which they were to take all reasonable actions necessary to reverse the transactions completed pursuant to the plan of restructuring.

31.  Under the above structure adopted for the investment in Show World, Fund II became the majority shareholder in My Show until the execution and implementation of the FPA.  In the meantime, Zhou Yang would have no direct or indirect shareholding in the WOFE at a time when the assets of Show World were transferred to the WOFE.

32.  In conjunction with the My Show SPA, Zhou Yang entered into a letter agreement with My Show (“the My Show Covenant”) by which he undertook to refrain from acting in other positions, engage in any other job or receive financial benefit or advantage from others and to devote all of his work and effort exclusively towards the fulfilment of his service obligations to My Show and/or its affiliates during a defined “Commitment Period”.

33.  The plaintiff was appointed to the board of My Show and he also became a director and the legal representative of the WOFE.

B4. How the SA came to be made and its provisions

34.  By mid-2006, Fund II had become fully invested and Mr Yan began discussing the idea of a new investment fund that subsequently became Fund III.  On about 23 August 2006, the plaintiff told Mr Yan that he did not wish to be a limited partner in Fund III because he wanted to establish his own investment fund.  Mr Yan was not happy at the prospect of the plaintiff leaving SAIF Partners and felt he might no longer trust the plaintiff.  News of the plaintiff’s possible departure started to leak out and Mr Yan thought that this might deter the investors in Fund II from investing in Fund III.

35.  Following a period of negotiation, the SA was executed by the plaintiff and Mr Yan on 11 December 2006.  Unlike the ALPA and the partnership agreements for Fund II and the Fund General Partner which are highly detailed agreements drafted by skilled expert lawyers, the SA was not drafted by lawyers.  The judge gave a summary of its provisions as follows^[13]:

“Clause 1 of the SA is in effect a recital recording that Mr Zhou would not be joining Fund III but was to depart from SAIF to form a new fund (“Newco”) that would focus on investing in earlier stage companies with smaller capital needs than Fund III.

Clause 2 provides that Mr Zhou would not solicit external investors (“LPs”) for investment in Newco before the earlier of the second closing date of Fund III or 1 April 2007 (“the Marketing Date”), after which date Mr Zhou was to be free to solicit LPs, including SAIF II and SAIF III LPs. (It is common ground that by reason of the events that happened, the Marketing Date is 7 February 2007).

Clause 3 provides:

“Transition: SAIF will, whenever it determines, make an announcement that Joe has become a Venture Partner and will remain a Venture Partner until the Marketing Date. As a Venture Partner, Joe will provide services to SAIF and will serve on behalf of SAIF as a director of existing boards or resign from existing boards responsibilities (and help transition those responsibilities) at the reasonable direction of SAIF until the Marketing Date. Upon the Marketing Date, Joe shall no longer be a Venture Partner and shall resign from all board responsibilities in his capacity as a SAIF representative.”

Clauses 4, 6, 9, 10 are of no relevance.

Clause 5 provides that Mr Zhou would receive 100% of his current salary and benefits and normal performance bonus at SAIF BJ and Sunstep for work performed to the end of 2006.  Thereafter he was to receive 50% of his salary and benefits.

Clause 7 provides:

“Other Provisions: SAIF and Joe will agree to a mutual non-disparagement and cooperation provision. As requested, Joe will not solicit any SAIF professional staff prior to October 31 2007. Except as explicitly amended by the provisions above, Joe remains subject to the obligations in previous agreements entered into between Joe and SAIF that are related to confidentiality, return of materials, etc. For the avoidance of doubt it is hereby acknowledged and agreed that as of the Marketing Date Joe shall not be subject to any non-compete or similar restriction (including any provision that would reduce Joe’s vested interests) by reason of forming Newco or joining another fund. The provisions in this memo supersede any previous agreements entered into between Joe and SAIF.”

Clause 8 provides:

“Vesting: Joe will have an additional nine months of vesting from November 1, 2006 with respect to his carry interest or points in SAIF Partners II LP. With this additional vesting Joe’s final vested percentage will be 51.78%. The non-vested portion of the additional nine months vesting shall continue to be vested as long as Joe has compliant [sic] with the provisions and obligations under the [sic] this separation agreements [sic]. For the avoidance of doubt, there shall be no recourse or reduction once the carry interest is vested.”

Clause 11 provides that save for the items specified, Mr Zhou would not be entitled to any other compensation from SAIF and under Clause 12 Mr Zhou agreed that his unfunded remaining capital commitments as a Partner to Fund II (total US$320,000) would be reallocated to other individuals designated by SAIF, whilst his personal capital commitment in Fund II (US$500,000) would remain in force.”

36.  Under the ALPA, if the plaintiff had stayed as a limited partner throughout, he would be entitled to 16.59% of the 1^st defendant’s profits.  By article 7.1(a) and (c), his entitlement to the Carried Interest would be reduced if he should become an “Inactive Partner” under any of the following circumstances (each, a “Trigger Event”): (i) he ceases to be an employee of the Fund Manager or its affiliates or to perform services for the 1^st defendant, Fund II, the Fund Manager or their affiliates for any reason; (ii) he gives notice of voluntary termination as an employee of the Fund Manager or its affiliates; (iii) he is given notice of his involuntary termination as an employee of the Fund Manager or its affiliates; or (iv) he commits any act (or failure to act) constituting “Cause”.

37.  “Cause” is defined in article 11.1 to mean:

“(a) a failure by such Limited Partner to comply in a material respect with or a material breach by such Limited Partner of any … (ii) policy of [the 2^nd defendant], [the 1^st defendant], the Fund General Partner, the Fund Manager or any of their Affiliates, provided that, in the case of this item (ii), such failure or breach has caused, or would reasonably be expected to cause, a material adverse effect on [Fund II], the Manager, any Portfolio Company or any of their respective Affiliates …;

…

(c) a failure by such Limited Partner to comply with or breach by such Limited Partner of any provision of Section 3.2 …”.

38.  The reduction to the entitlement to Carried Interest on the occurrence of a Trigger Event is calculated by multiplying the points allocation of the limited partner with an “Applicable Percentage”.  The Applicable Percentage would depend on inter alia these factors:

(1) The timing at which the plaintiff left

39.  Under article 7.1(c), the plaintiff’s Applicable Percentage would be zero if he should become an Inactive Partner before 1 November 2006 (the first anniversary of the Final Closing). After that, he would get a base Applicable Percentage of 20.24% and for each additional month he stayed, his Applicable Percentage would increase by 1.66%.

(2) Whether the plaintiff had committed “Cause”

40.  If the plaintiff’s status as a limited partner should end “due to Termination with Cause” after 1 November 2006, his Applicable Percentage would be reduced by 95%, pursuant to proviso (iv) to article 7.1(c). This is the “proviso (iv) point” pursued by the defendants below and on appeal.

41.  Based on the timing at which the plaintiff decided to leave, his Applicable Percentage would have been 36.84% under article 7.1(c) of ALPA. However, by clause 8 of the SA, he was given an additional nine months’ vesting at 1.66% per month, whereby his Applicable Percentage would increase to 51.78% (36.84% + 1.66% x 9) on final vesting.

42.  The plaintiff’s salary and his work in respect of Fund II ceased as from 28 February 2007 and during March 2007 he resigned from the various directorships he held on the board of the portfolio companies of Fund II.

B5. How the disputes arose

43.  Following his departure from Fund II, the plaintiff joined Kleiner Perkins Caulfield & Bayes (“KPCB”) and participated in the launch of KPCB China Fund LP on 24 April 2007.

44.  On 24 August 2007, the Xinrui Investment Agreement was made between Keygate Technologies Co Ltd (“Keygate”; a Cayman Islands exempted limited liability company), KPCB China Fund LP (as the investor), Ding Jun^[14], Ms Zhou Fei^[15], Xinrui (Beijing) Technology Company (“Xinrui”) and Neogrid Sci & Tech (Beijing) Co Ltd, under which KPCB China Fund LP invested US$8 million in Xinrui/Keygate.  The plaintiff was the deal champion for this investment on behalf of KPCB China Fund LP.

45.  In April 2008, having left KPCB, the plaintiff set up Keytone Ventures LP (“KV”).

46.  Sometime around July/August 2008, Mr Zhao acting on the instructions of Mr Yan, began an investigation into the affairs of the WOFE and My Show.  Certified public accountants were instructed to carry out an investigatory audit of transactions between the WOFE, Xinrui, Beijing My Show Advertising Co Ltd (“My Show Ad”) and Beijing Wu Xian Wei Ke Science and Technology Co Ltd (“Mobile Winks”).  The auditors’ report was issued on 31 March 2009.

47.  In mid-October 2008, the plaintiff received a letter dated 15 October 2008 signed by Mr Yan on behalf of the 2^nd defendant/My Show giving notice that the plaintiff’s Applicable Percentage had been reduced by 95% and alleging that this was a “Termination with Cause” under proviso (iv) to article 7.1(c) of the ALPA in that he had committed Cause by conducting himself in a manner that adversely affected one or more of the 1^st defendant, Fund II and Fund II’s portfolio companies.

48.  The alleged conduct of the plaintiff said to constitute Cause spanned the time from April 2006 when he was still an active limited partner down to and after the SA and his subsequent departure from SAIF Partners on 28 February 2007.  The defendants further contended that the conduct alleged to constitute Cause also constituted breaches of fiduciary duties owed by the plaintiff to the 1^st and/or 2^nd defendants.

49.  The alleged misconduct was summarised by the judge as follows^[16]:

“(1) Whilst he was on the boards of the WOFE and My Show, and without informing his partners of what he was doing, Mr Zhou caused a loan of US$2,500,000 to be made on 15 September 2006 by My Show (D2) to Zhou Yang personally, rather than to the WOFE, the security for which loan was extremely tenuous and in circumstances where he acted:

(a) contrary to the instructions of Mr Yan to ensure that effective financial controls were in place in the WOFE and Show World; and

(b) failed to monitor Zhou Yang’s use of the money.

The Defendants’ principal contention is that such conduct constituted “Cause” because it adversely affected Fund II, D1 and the WOFE, contrary to the non-disparagement covenant in Art 3.2(d) and was a failure to comply with the “policy” of the Defendants as required by para (a) of the definition of “Cause” in Art 11 of the ALPA, the policy in question being to keep tight financial control in accordance with the instructions of Mr Yan given in the lead-up to the Investment Committee’s approval of the My Show transaction.

(2) Mr Zhou wrongfully participated in Zhou Yang’s development and commercialization of “Diandao” (Point Advertising) technology through Xinrui and Keygate Technologies Co Ltd (“Keygate”) and “Color Call” technology through Beijing Wu Xian Wei Ke Science and Technology Co Ltd (“Mobile Winks”), when these technologies belonged to and/or should have been developed and monetised by the WOFE. Put shortly, Point Advertising is a form of targeted online advertising based on a user’s internet searches. The technology was developed by Ding Jun starting in mid‑2006. Ding Jun was employed by the WOFE from October 2006 to February 2007. The Defendants’ principal contentions are that Mr Zhou committed the following acts constituting Cause:

(i) in breach of the non-solicitation covenant in Art 3.2(a)(ii), he solicited Zhou Yang to act in breach of the My Show Covenant by which Zhou Yang undertook to devote all of his work effort exclusively towards the fulfillment of his work obligations to My Show and use his best efforts to promote My Show’s interest and business;

(ii) in breach of the confidentiality covenant in Art 3.2(b), he made use for his own benefit of information in respect of Fund II and My Show; and

(iii) in breach of the non-disparagement covenant in Art 3.2(d) he conducted himself in a manner adversely affecting D1 and the WOFE.

(3) Mr Zhou assisted in the establishment of a company called Beijing My Show Advertising Co Ltd (“My Show Ad”) by Zhou Yang but failed to take steps to ensure that Zhou Yang kept the company as part of the WOFE’s business and could not inject it into a business outside the ownership and control of the WOFE. The Defendants contend that this conduct amounted to Cause in that it adversely affected Fund II, D1 and the WOFE, contrary to the non-disparagement covenant in Art 3.2(d).”

50.  In October 2010, the plaintiff issued a writ in this action (HCA 1551/2010) against the 1^st defendant to claim damages for breach of the SA by reason of the failure to pay his entitlement to distributions attributable to Carried Interest under the ALPA.  The writ was amended in September 2011 to add the 2^nd defendant.  The defendants served their defence and counterclaim in November 2012.  The action was transferred to the Commercial List in 2016.

C. THE HOLDINGS IN THE JUDGMENT

51.  The parties’ main contentions were summarised by the judge as follows:

“It was submitted on behalf of Mr Zhou that: (A) by reason of Clause 8 [of the SA], including in particular the last sentence thereof, the Defendants were contractually debarred from reducing Mr Zhou’s final vested percentage of 51.78%; (B) further or in the alternative, by reason of the last sentence of Clause 7 [of the SA], the whole of the ALPA, save for the obligations relating to “non-disparagement, cooperation and confidentiality, return of materials, etc” was superseded by the SA; and (C) on the true interpretation of the SA, Mr Zhou was free from any covenants contained in the ALPA as from the Marketing Date (7 February 2007) or at the latest 28 February 2007.”^[17]

“The Defendants contended that:

  (I)   the SA cannot have been intended to supersede ALPA completely because:

(i)   Mr Zhou’s entitlement to a vested percentage of 51.78% predicates an on-going entitlement to Carried Interest Distributions under Art 6.1(b)(ii) of the ALPA; and

(ii)   by its terms (eg Clauses 4 and 7) the SA contemplates the continuing operation of the covenants contained in Arts 3.2(d) and 3.2(e);

(II)   it is only in relation to the power to police breaches of the SA contemplated by the condition in Clause 8 that Mr Zhou be compliant with the SA, that the words, “there shall be no recourse reduction once the carry interest is vested” is intended to apply;

(III)   such parts of the SA that might constitute a release by the Defendants of any claim they may have had against Mr Zhou founded on Cause was not binding on the Defendants on the ground that Mr Zhou was guilty of sharp practice in not declaring that the Defendants had such a claim; and

(IV)   alternatively to (III), the SA stood to be rescinded and/or the defendants were entitled to damages on the ground that Mr Zhou had falsely represented that he had not misconducted himself in a manner constituting Cause, Mr Zhou being under a duty to inform Mr Yan that he (Mr Zhou) had been guilty of Cause in the respects now alleged against him.”[18]

52.  The judge stated the following conclusions on his findings on the meaning and effect of the SA and the ALPA:

“(1) By reason of the final sentence of Clause 8 of the SA, the Defendants are contractually debarred from advancing their claim that Mr Zhou’s applicable percentage is that set out in proviso (iv).

(2) Even if there is no contractual bar on the Defendants’ case based on “Cause”, that case fails in limine because it is dependent on proviso (iv), and on the true interpretation of that provision and on the unchallenged facts, Mr Zhou did not become “an Inactive Partner due to Termination with Cause” but became an Inactive Partner by virtue of a consensual termination resulting from the SA, this being a termination that was not causally linked to his having committed any act or acts constituting Cause.

(3) Even if the Defendants’ interpretation of Art 7.1 be correct, so that “Termination with Cause” in proviso (iv) means termination preceded by unknown conduct amounting to Cause:

(a) the Defendants cannot rely on acts said to constitute Cause committed by Mr Zhou after he had left the employment of SAIF Partners on 28 February 2007; and

(b) the Defendants’ contentions that Mr Zhou committed acts constituting Cause by failing to comply in a material respect with a “policy” of strict financial control and/or by conducting himself in a manner adversely affecting, inter alios, Fund II, the Fund II General Manager (D1) and the WOFE Defendants, are misconceived in that such conduct does not fall within the definition of Cause.

(4) There is nothing in the SA or the ALPA that would have prevented the Defendants from bringing a claim for losses suffered as a result of any breach by Mr Zhou of the covenants contained in Art 3.1 and Art 3.2 committed before 28 February 2007.”^[19]

53.  The plaintiff’s claim for unpaid Carried Interest therefore succeeded.

54.  The judge held that the plaintiff was under a fiduciary duty not to act contrary to, or put his own interest before, the interests of the 1^st defendant and those of his Fund II co-partners^[20].  He made these findings on the alleged misconduct of the plaintiff:

(1) The US$2.5 million loan

55.  The defendants’ claim for breach of fiduciary duty in respect of the US$2.5 million loan to Zhou Yang failed on the facts.  The judge found that the plaintiff honestly believed that the money would be used to meet the WOFE’s working capital requirements and that Zhou Yang could be trusted to use the money for those purposes.^[21]

56.  If, contrary to his ruling and the defendants’ interpretation on clause 8 of the SA and on proviso (iv), “Cause” and “policy” in the ALPA is correct, the judge found that the plaintiff had failed to ensure effective financial control over the US$2.5 million and to honour his assurance to devote sufficient time to the supervision of the My Show investment and had thereby committed “Cause”^[22].

(2) Xinrui

57.  The judge found that the plaintiff acted in his own interest rather than in the interest of the 1^st defendant and his Fund II co-partners in colluding with Zhou Yang to establish Xinrui as an enterprise separate from My Show and the WOFE whilst he was still an active partner under the ALPA.  The 1^st defendant succeeded on its counterclaim for account of profits for breach of fiduciary duty in this respect^[23].

58.  If the judge is wrong about the construction of the SA and the ALPA, he found that the plaintiff had committed “Cause” in soliciting Zhou Yang to act in breach of the My Show Covenant (contrary to article 3.2(a)(ii)) and in making use for his own benefit confidential information (contrary to article 3.2(b))^[24].

(3) Mobile Winks

59.  The counterclaim in respect of Mobile Winks for account of profits made in breach of fiduciary duty failed for lack of proof that the plaintiff or KV or KPCB ever invested in Mobile Winks^[25].

60.  If the judge is wrong to hold that the plaintiff was not subject to the article 3.2 covenants after he left his employment with SAIF Partners on 28 February 2007 and is also wrong about the meaning and effect of the SA and article 7.1 of the ALPA, he found that from mid-2007 the plaintiff solicited Zhou Yang to breach the My Show Covenant and misused confidential information in his dealings with Zhou Yang concerning Mobile Winks^[26].

(4) My Show Ad

61.  The judge found that Zhou Yang did not incorporate My Show Ad with the intention that it should be a secret competitor to the WOFE and that the plaintiff was entitled to trust Zhou Yang to ensure that My Show Ad was run as part of the business of the WOFE.  The conduct complained of would not constitute “Cause” or breach of fiduciary duty. The counterclaim for account of profits in respect of My Show Ad failed on the facts^[27].

(5) Disparagement

62.  The allegation that the plaintiff acted in breach of fiduciary duty and contrary to article 3.2(d) of the ALPA in making various public statements that disparaged the 1^st defendant, the Fund General Partner and Fund II was not substantively pursued at the trial and in any event lacked any foundation for a claim for an account of profits^[28].

63.  In respect of the counterclaim for account of profits which he found in the 1^st defendant’s favour, the judge ordered the 1^st defendant to hold on trust for Fund II any profit made by the plaintiff personally as a result of the Xinrui Investment Agreement and to be disgorged by him^[29].

D. THE PLAINTIFF’S APPEAL

D1. The issues in the plaintiff’s appeal

64.  Six main issues are raised by the plaintiff on appeal and they would be discussed in the order set out below:

(1) Fiduciary duties

65.  Whether the judge was right in finding that the plaintiff owed fiduciary duties, that he had breached fiduciary duties, and if the wrong standard of proof was applied.

(2) Proper plaintiff and jurisdiction

66.  Whether the judge had the requisite jurisdiction to grant the relief in favour of the 1^st defendant on the counterclaim, given that the Fund II Investors and the WOFE were not before the court and had not asserted any claims.

(3) Reflective loss

67.  Whether the defendants’ counterclaim is barred by the principle against reflective loss.

(4) Order for accounts

68.  Whether the judge had the requisite jurisdiction to make the further directions for the taking of an account of profits.

(5) The “abuse” case

69.  Whether the judge was right in refusing to rule on the plaintiff’s case that the defendants had abused the process of the court by raising the defence and counterclaim herein.

(6) Costs

70.  Whether the judge was right in ordering the plaintiff to pay 65% of the costs of the defendants in respect of their account of profits counterclaim and making no separate order for costs against the 2^nd defendant.

D2. Fiduciary duties

D2.1 If fiduciary duties were owed by the plaintiff

71.  Mr Barlow repeated his submissions before the judge^[30]. He placed great emphasis on the structure of the Fund II entities, that they chose to set up in the Cayman Islands for tax and regulatory advantages.  The structure of those entities was chosen to preclude any possibility that offshore jurisdictions (such as the PRC) might consider the fact that the investment professionals were working there to be indicative of the 1^st defendant and/or Fund II carrying on business there.  All the contractual connections were adopted with written contracts each containing an “entire agreement” clause^[31].  The management of the affairs of Fund II was contracted out to the Fund Manager, and the affiliates of the Fund Manager entered into consultancy and employment contracts with investment professionals like the plaintiff.

72.  Further in support of his contention it was the clear intention of the parties to the ALPA that limited partners such as the plaintiff would not owe fiduciary duties to the 1^st defendant, Mr Barlow pointed to the ELP Law, which, in his submission, makes the general partner the agent and fiduciary of the exempted limited partnership, with sole control over the partnership assets and excludes the limited partner from the rights and obligations of taking part in the conduct of business of the partnership, of entering into contracts, deeds and instruments on behalf of the partnership. Similar provisions are contained in article 2 of the ALPA, which sets out the powers of the general partner (the 2^nd defendant) and the limited partners (which included the plaintiff).   By article 2.1, the management, control and operation of and the determination of policy shall be vested exclusively in the general partner, who shall carry out all of the powers of the partnership and perform all acts and enter into all contracts and undertakings.  By article 2.2, the actions of the general partner taken in accordance with the ALPA shall bind the 1^st defendant’s assets. Article 2.3 provides that a limited partner shall not participate in the control of the 1^st defendant’s business, transact any business in the 1^st defendant’s name or otherwise bind the 1^st defendant.  There is no provision in the ALPA providing for the assumption of fiduciary duties by the limited partners.

73.  In light of the above matters, he submitted that it would require a rewriting of the relevant elaborate contractual structures including the ALPA, which the ELP Law does not permit, to hold that the plaintiff should owe fiduciary duties to the 1^st defendant.  He cited various dicta to make the point that “the fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction” (Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97, per Mason J), that “the nature and terms of the contractual relationship between the parties will be determinative of the scope of the responsibility assumed” (Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 206E to F, per Lord Browne-Wilkinson ), and that “the scope of the fiduciary obligations both arises out of, and is circumscribed by, the contractual terms; it is circumscribed because equity cannot alter the terms of the contract validly undertaken” (University of Nottingham v Fishel [2000] ICR 1462 at 1491, per Elias J ).

74.  It has never been in doubt that contractual and fiduciary relationship may co-exist between the same parties. As stated by Mason J in Hospital Products in the earlier part of the same extract at 97, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship.  Mason J went on to say that it is the contractual foundation which is all important because it regulates the basic rights and liabilities of the parties and if the fiduciary relationship is to exist, it must accommodate itself to the terms of the contract so that it is consistent with and conforms to them.  Mason J further noted at 98 that in cases where a comprehensive fiduciary relationship does not exist, it does not exclude the existence of a more limited fiduciary relationship, for it is well settled that a person may be a fiduciary in some activities but not in others.

75.  It is also well settled that even in a commercial relationship of a generally non-fiduciary kind, there may be aspects which engage fiduciary obligations of loyalty, as explained by Blanchard J in Maruha Corp v Amaltal Corp [2007] 3 NZLR 192 at [21]:

“That is because in the nature of that particular aspect of the relationship one party is entitled to rely upon the other, not just for adherence to contractual arrangements between them, but also for loyal performance of some function which the latter has either agreed to perform for the other or for both or has, perhaps less formally, even by conduct, assumed.”^[32]

76.  The first question to consider is whether, generally speaking, a limited partner in an exempted limited partnership may owe a fiduciary duty to the partnership under the ELP Law, notwithstanding the statutory provisions regarding the powers and obligations of the general and limited partners.  The three experts on Cayman Islands law^[33] are in agreement about this as they have stated in the joint expert report:

“We agree that the Exempted Limited Partnership Law of the Cayman Islands does not preclude fiduciary duties derived from the [ALPA] (if any) being owed by the Plaintiff to SAIF Partners (including the 1^st and 2^nd Defendants and Fund II).”

“We agree that … (iv) A limited partner may owe a fiduciary duty to the exempted limited partnership or to an affiliate of the exempted limited partnership by reason of an agreement or relationship between them which gives rise to such duty, in the same way as a fiduciary duty may arise out of any agreement or relationship between two or more parties.”

77.  The question that follows is whether the particular circumstances here justify the imposition of fiduciary duties on the plaintiff and if so what should the fiduciary duties consist of.

78.  It is not in dispute that the law of the Cayman Islands governing the question whether the ALPA gives rise to any fiduciary duties owed by the plaintiff to the 1^st defendant is the same as the applicable English law, which is the same as the applicable law of Hong Kong^[34].

79.  I agree with the judge that the entire agreement clause does not preclude the existence of fiduciary duties, if a party to the contract is under an obligation to act in the interests of another (which is the foundation of a fiduciary relationship), as it is trite law that entire agreement clauses do not preclude the implication of terms into a contract^[35]. It is immaterial that there is no express provision in the ALPA providing for the assumption of fiduciary duties by the limited partners, or that the plaintiff was a salaried employee and a fee-earning consultant under separate contractual arrangements entered into for tax and regulatory reasons.  What is more important is the substance of the role and the actual responsibilities undertaken by the plaintiff with regard to the business of Fund II.

80.  I agree also with the judge that although the structure of the Fund II entities may have been designed to preclude the exposure of individuals to claims from external parties, it did not preclude claims between the parties to the agreements, as exemplified by article 3.2(f) of the ALPA, which provides that the partnership shall have the right to pursue all remedies at law or in equity available to it with respect to any of the covenants of each Limited Partner and Principal Limited Partner in article 3.2^[36].

81.  Nor do I think the provisions in articles 2.1 to 2.3 would exclude the existence of fiduciary duties.  As rightly pointed out by Mr Manzoni, these provisions delineate a limited partner’s powers vis‑à‑vis outside third parties qua limited partner, and do not deal with the duties of the limited partner amongst the partners themselves qua other capacities.  The last sentence of article 2.3 expressly provides that this article “shall not prevent any Person from acting on behalf of, or with respect to, the Partnership in a capacity other than as a limited partner”.

82.  The judge held that the nature of the fiduciary duties owed by the plaintiff is not to act contrary to, or put his own interest before, the interests of the 1^st defendant and those of his Fund II co-partners^[37]. This appears to me to be well justified by the covenants the plaintiff had taken on under the ALPA (in particular articles 3.1 and 3.2(b)), and the manner in which the limited partners expected each other to carry out their roles and activities under the ALPA, which has been described in some detail earlier in this judgment.  As noted by the judge, the partners were all entitled under article 6 to distributions paid out of 20% of the profits realised on Fund II’s investments, those profits being the result of the collective efforts of the partners to select and nurture investments for the benefit of the external investors, and the partners depended on each other for co-operation and expected each other to do their best in making a success of the business of Fund II^[38].

83.  In the discharge of the plaintiff’s responsibilities as a Limited Partner, a Principal Limited Partner and a member of the Investment Committee under the ALPA, and a Principal under the Fund II LPA, the co-partners of the plaintiff are clearly entitled to rely upon him, not just for adherence to contractual arrangements between them, but also for loyal performance of the obligations which he had undertaken to perform for the 1^st defendant, the Fund General Partner and Fund II.  

84.  I reject the submission that the imposition of fiduciary duties in this situation would be inconsistent with the ELP Law, the way the Fund II entities were structured, or the ALPA.  Far from re-writing the contract as contended by Mr Barlow, the judge had relied on the contractual relationship as foundation to hold that fiduciary duties were owed by the plaintiff in this instance.

D2.2 If the plaintiff had breached fiduciary duties

85.  The plaintiff contended even if (contrary to his primary case) he did owe fiduciary duties to his co-partners, the defendants failed to make out any case that he had breached those duties either by (a) depriving the 1^st defendant or the Fund II investors of any obtainable business opportunity or by placing himself in a conflict of interest or by obtaining the opportunity to make a secret profit for himself;or (b) depriving the 1^st defendant or the Fund II investors of any business opportunity that the 1^st defendant had not waived.

86.  In respect of (a), it was argued that such conduct could not constitute a breach because it was not an opportunity the 1^st defendant, Fund II or the WOFE would be able to take up because: Fund II’s investment in the My Show companies was capped at US$8 million; by mid-2006, Fund II had become “fully invested” meaning that it could not raise funds for new investment opportunities (which would be directed to Fund III); and KPCB China Fund LP had made an investment of US$8 million to fund the new technology under the Xinrui Investment Agreement.

87.  It was further submitted that the plaintiff’s dealings with Zhou Yang about an investment in an entity that would develop the Diandao technology, which took place after the SA had been executed, could at most only constitute preparatory steps that a fiduciary is entitled to take for his future livelihood, even when he is still subject to his duty, and in relation to a non-tangible and immature business opportunity, citing Kao Lee & Yip v Koo Hoi Yan & Ors [2003] 3 HKLRD 296 at §§57(5), 70 to 76 and 118; and Foster Bryant Surveying Ltd v Bryant [2007] Bus LR 1565 at §8.  The judge had therefore disregarded the speculative and developmental nature of the later investment in Xinrui by KPCB and was wrong in principle.

88.  As for the waiver in (b), reliance was placed on the penultimate sentence of clause 7 of the SA which reads: “For the avoidance of doubt it is hereby acknowledged and agreed that as of the Marketing Date Joe shall not be subject to any non-compete or similar restriction (including any provision that would reduce Joe’s vested interests) by reason of forming Newco or joining another fund.”

89.  The above arguments are entirely without merit.

90.  As submitted by Mr Manzoni, the breaches of fiduciary duties complained of went further than depriving the 1^st defendant or the Fund II investors of a business opportunity.  The plaintiff’s first breaches occurred when he acquiesced in and encouraged Zhou Yang’s wrongdoing with regard to the Diandao technology and had thereby solicited Zhou Yang to act in breach of the My Show Covenant.  He also breached the confidentiality covenant by which he was required not to disclose or use for his own benefit confidential information with respect to any portfolio company.  In relation to such breaches, it is not necessary to prove that the plaintiff had deprived the defendants of a business opportunity which the defendants were able to make use of.

91.  Besides, it is well established that a fiduciary’s duty of loyalty is absolute and it is irrelevant whether the principal could have made use of the business opportunity for itself (Waddington Limited v Chan Chun Hoo Thomas, CACV 10/2014, 20 May 2016, §§69 to 73).  The concept of a mature or tangible business opportunity is not relevant either, as a business opportunity is not germane to breaches of this nature.

92.  Kao Lee & Yip v Koo Hoi Yan is of no assistance to the plaintiff.  It is a question of fact and degree whether the taking of preparatory steps for the future whilst still in a fiduciary relationship would be regarded as permissible or in breach of fiduciary duties.  Here, the plaintiff went over the boundary of what was permissible. As found by the judge, a week or so before 6 February 2007, the plaintiff was in serious discussions with Zhou Yang about investing in a company that would utilize the Diandao technology in competition with the WOFE and that amounted to solicitation^[39]. There is no basis to interfere with this finding of fact.

93.  As for waiver, this point was not run below nor was this raised in the supplementary notice of appeal. Waiver must be specifically pleaded and proven (Hong Kong Civil Procedure 2019, vol 1, §18/8/11).  I agree also with Mr Manzoni that the penultimate sentence of clause 7 of the SA cannot be construed as any sort of waiver of breaches committed by the plaintiff. 

D2.3 If the wrong standard of proof was applied

94.  This may be dealt with shortly.  The plaintiff’s complaint is that the judge failed to apply the “higher standard of proof” required to prove any claim of dishonest breach of fiduciary duty as regards the counterclaim relating to Xinrui.

95.  The judge was fully aware of and had cited^[40] the principle in In Re H (Minors) [1996] AC 563 at §§73 to 74, per Lord Nicholls. Dishonesty does not require a “higher standard of proof”, it only means that the inherent improbability of fraud is to be taken into account when weighing the probabilities and deciding whether, on balance, fraud was established.  The matters set out in the supplementary notice of appeal §10 do not support the contention that the judge had failed to apply the right standard of proof in his evaluation of the evidence.

D3. Proper plaintiff and jurisdiction

96.  The judge noted that neither the external investors who contributed to Fund II (being the ultimate beneficiaries to whom the plaintiff owed the duty not to make a secret profit) nor Fund II are parties before the court.  And it is the case that the 1^st defendant’s proprietary interest in the profit made by the plaintiff personally on the Xinrui Investment Agreement is limited to 20% of that profit that would have been transferred to the 1^st defendant by the Fund General Partner.  The judge held that in order to avoid over-recovery by the 1^st defendant and to protect the interests of Fund II, the 1^st defendant must hold the profit made on the Xinrui Investment Agreement to be disgorged by the plaintiff on trust for Fund II^[41].

97.  The plaintiff’s contention is that there is no jurisdiction to order him to account to the 1^st defendant as trustee for non-parties who had chosen not to assert any such claims.  The argument runs as follows.

98.  There is confusion in the judge’s holdings.  He had at first held (incorrectly) that the plaintiff’s breaches arose out of the failure to secure for the WOFE the technology developed by Xinrui^[42], when, after 28 February 2007, the plaintiff was free to compete with Fund II by virtue of the penultimate sentence of clause 7 of the SA.  When the judge came to consider the remedy for the plaintiff’s breach of fiduciary duty in respect of Xinrui, he held that the ultimate beneficiaries to whom the plaintiff owed fiduciary duties were the external investors who contributed to Fund II^[43]. The first holding identified the WOFE as the entity to whom the claims belonged, whereas the second holding identified the Fund II investors as the parties or entities to whom the claims belonged.  These two holdings cannot be reconciled.

99.  The judge disregarded the fact that the Fund II investors were not before the court and had not asserted any claims in respect of the Xinrui counterclaim.  The only potential claimant was the WOFE.  The judge had no jurisdiction to determine any claim that the plaintiff had breached his fiduciary duties to the WOFE, because the WOFE was not made a party to this action and the defendants had no locus standi to claim on its behalf.  Furthermore, the defendants’ claims are reflective of the claims of the WOFE or Fund II or the Fund II investors and are precluded by the reflective loss principle.

100.  A court is obliged to ensure that all parties necessary for the determination of a dispute are brought before it, see Order 15 rule 4(2) of the Rules of the High Court^[44] and Performing Right Society Ltd v London Theatre of Varieties Ltd [1924] AC 1 at 14 to 15, 19 to 20.  The plaintiff had pleaded in his Re-amended Reply and Amended Defence to Counterclaim at §78 that neither Fund II nor the Fund General Partner is a party to the present proceedings and that the 1^st defendant is not entitled to bring claims against the plaintiff on behalf of these entities in these proceedings.  The 1^st defendant cannot sue the plaintiff in its own name as an agent for a non-party, as proceedings taken by an agent have to be taken in the name of the principal, not the agent, see ChinaVest II-A, LP v Chan Kueng Un Roy [1998] 4 HKC 453 at 458I to 459A.

101.  I will leave aside for the time being the question concerning reflective loss, which will be considered in the next section of this judgment.

102.  Contrary to the plaintiff’s submission, there is no confusion in the judge’s holdings.  It was pleaded in the Re-amended Defence and Counterclaim that the plaintiff owed fiduciary duties to “SAIF Partners”^[45] (including the 1^st and 2^nd defendants and Fund II) by virtue of the relationship of the parties, his role and activities, and the trust and confidence reposed in him by the other limited partners^[46].  The judge considered the question whether fiduciary duties were owed by the plaintiff to, inter alios, the 1^st and 2^nd defendants as pleaded and the nature of such duties^[47].  As mentioned earlier, he found in favour of the defendants.  It is apparent from the discussion in §§106 to 108 of the judgment that these fiduciary duties were found to be owed to the 1^st and 2^nd defendants and Fund II.

103.  It is wrong to suggest that the judge had found that fiduciary duties were owed by the plaintiff to the WOFE.  The nature of the fiduciary duty owed by the plaintiff was “not to act contrary to, or put his own interest before, the interests of D1 and those of his Fund II co‑partners”^[48]. Specifically in relation to the Xinrui investment, the judge found that the plaintiff, in acting as he did in conjunction with Zhou Yang from around late January 2007 down to the conclusion of the Xinrui Investment Agreement, had acted “in breach of his fiduciary duty owed to D1 in that he put his own interest ahead of the interest of D1 and his co‑partners and thereby profited from his position held under the ALPA”^[49].

104.  For the above reasons, the 1^st and 2^nd defendants are clearly entitled to bring this action on their own behalf pursuing remedies in respect of breaches of fiduciary duties owed by the plaintiff to them.  That the WOFE was not a party before the court is quite simply irrelevant (subject to the discussion below on reflective loss).

105.  What about the position of Fund II and the investors of Fund II being the limited partners thereof, who are not parties to this action?  The question is whether there is irregularity in the proceedings and what impact this may have on the judgment and the orders made.

106.  In ChinaVest II-A, LP v Chan Kueng Un Roy, the action was brought by ChinaVest II-A, LP, a Cayman Islands limited partnership, as the sole plaintiff, being the “disbursement agent” appointed under a disbursement agreement to facilitate the disbursement to the sellers of the purchase price payable by the defendant under a share transfer agreement.  The sellers were the plaintiff and a number of different companies incorporated in various parts of the world. By an instrument headed ‘authorisation’, the plaintiff was authorised to initiate legal action on behalf of all the other sellers to seek recovery of all amounts owing under the share transfer agreement.  One of the points taken on appeal was whether the action was properly constituted.  The plaintiff originally argued that it was entitled to bring the action in its own name as the agent of the sellers. This was rejected by the Court of Appeal in that the law is clear, as proceedings taken by an agent have to be taken in the name of the principal, not the agent.  The reference in the statement of claim to the plaintiff acting as the authorised agent of the sellers would not be sufficient to justify the proceedings being brought in the sole name of the plaintiff.

107.  The plaintiff there eventually took another tack and relied on Order 15 rule 12(1), which provides that where numerous persons have the same interest in any proceedings, the proceedings may be begun by any one or more of them as representing all or as representing all except one or more of them.  The Court of Appeal permitted this course, noting that although the number of sellers were not in any sense numerous, all were content that the action should have been brought by the plaintiff as one of the sellers representing them all.  The Court of Appeal ordered all the sellers be added as plaintiffs in the proceedings (as it would be unsatisfactory to leave this as a representative action, where a number of sellers were incorporated outside the jurisdiction) and on that basis held the action to be properly constituted.

108.  It was pleaded in §60 of the Amended Counterclaim that so far as the 1^st defendant’s entitlement to claim on behalf of Fund II is concerned, reliance is placed upon clause 1.6(e) of the Fund II LPA, which gives the Fund General Partner the ability to bring proceedings on behalf of Fund II, and clause 1.6(g) of the SAIF II GP LPA, which in its turn gives the 1^st defendant the ability to bring proceedings on behalf of the Fund General Partner.

109.  This seems to be missing the point.  The defendants may well be authorised to bring proceedings on behalf of Fund II, as was the plaintiff on behalf of the other sellers in ChinaVest II-A, LP.  But they would still need to overcome the rule that an agent may not sue on behalf of the principal in its own name.  Mr Manzoni did not seek an order from this court to appoint the defendants as representing Fund II and the limited partners of Fund II under Order 15 rule 12(1), or an order joining Fund II and all its limited partners as co-plaintiffs in the counterclaim under the inherent jurisdiction of the court.

110.  Granted that the defendants are not entitled to sue in its own name on behalf of Fund II and its limited partners, is there any other permissible way out for the defendants?  The judge used the method of requiring the defendants to hold on trust for Fund II the profit made on the Xinrui Investment Agreement to be disgorged by the plaintiff.  The counterclaim remains a claim brought by the defendants to pursue their remedy against the plaintiff for breach of fiduciary duties owed to them, which they are entitled to bring on their own, without joining Fund II and the limited partners of this fund.  Order 15 rule 4(2) does not apply to this situation, as this is not a claim for relief to which any other person is entitled jointly with the defendants.  Nor is this a situation in which the defendants are not competent to sue alone, such as the case of an equitable assignee who was unable to sue for a permanent injunction without joining the legal owner as considered in Performing Right Society Ltd v London Theatre of Varieties Ltd.

111.  Insofar as the defendants may recover more than their entitlement out of the 20% of the profit that would have been transferred to the 1^st defendant by the Fund General Manager under the Fund II LPA, the device of holding such profit on trust for Fund II would “avoid over‑recovery by D1 and … protect the interests of Fund II”^[50]. The judge had found earlier that the plaintiff did owe fiduciary duties to the limited partners of Fund II and was in breach of the duties owed to them. 

112.  I see the judge’s method as a viable alternative.  The following provisions in the partnership agreements are of note.  I have mentioned clause 1.6(e) of the Fund II LPA and clause 1.6(g) of the SAIF II GP LPA, which empower the general partner of the partnership concerned to bring proceedings on behalf of that partnership. Clause 1.6(a) of the Fund II LPA (the corresponding provision of the SAIF II GP LPA is clause 1.6(c)) empowers the general partner on behalf of the partnership to acquire, hold, manage, own and transfer any assets held by the partnership. Clause 2.1 of the Fund II LPA provides that the management, control and operation of the affairs of the partnership shall be vested exclusively in the general partner.  Clause 2.1(a) of the SAIF II GP LPA provides similarly that the management, control and operation of the partnership, its investments and other activities shall be vested exclusively in the general partner.

113.  In light of these provisions, the 1^st and 2^nd defendants as the general partner of the respective partnerships are empowered to bring proceedings on behalf of Fund II, to hold on trust the asset acquired for Fund II being the profit to be disgorged, and exclusively to deal with the profit by making distribution to the limited partners according to their entitlement under the relevant partnership agreement.  By authorising the defendants to bring the counterclaim and hold on trust the profit to be disgorged for Fund II, Fund II must be taken to have elected to pursue its remedy against the plaintiff by this route, and would be barred from bringing a new claim in its own name.  In other words, Fund II would be bound by the outcome of these proceedings, and hence the essential purpose had it been joined as a party would similarly be achieved. 

114.  These words of Lord Clarke in Roberts v Gill [2011] 1 AC 240 at §128, although said in a different context (a beneficiary under a will seeking to bring a derivative action in his own name on behalf of the estate against a third party), are apposite:

“For example, there may be no real point in joining the trustee, administrator or company if appropriate undertakings are given by the claimant to hold any monies recovered for his or its benefit, especially if he or it consents. It has been suggested that one reason for joinder is that, if the derivative action fails, the trustee, administrator or company might bring another action in the future. Where such an action would be time-barred, again there would be no such risk. Moreover, there is now a general principle that no action should fail for non-joinder of a party: see the William Brandt case [1905] AC 454, 462, per Lord Macnaghten. …”

115.  Notwithstanding there is no direct authority in support of the defendants’ proposition, I am satisfied that the method devised by the judge did not fall foul of any principle in law and is procedurally feasible.  I reject the plaintiff’s contention that the judge had no jurisdiction to grant relief on the counterclaim on the ground that Fund II, the Fund II investors and the WOFE were not parties to this action.

D4. Reflective loss

116.  The plaintiff’s contention is that the judgment on the Xinrui counterclaim was made without jurisdiction as this is precluded by the principle barring claims for reflective loss.  It was pleaded in §§77 and 78 of the Re-amended Reply and Amended Defence to Counterclaim that if the matters complained of caused any loss to the defendants, Fund II or the Fund General Partner, such loss is merely reflective of loss suffered by entities in which the defendants, Fund II and/or the Fund General Partner have a direct or indirect interest and in respect of which such entities may bring their own claims against the plaintiff and is therefore not recoverable by the defendants, Fund II and/or the Fund General Partner by reason of the principle against recovery of reflective loss.

117.  This issue of reflective loss, although pleaded in the Re‑amended Reply and Amended Defence to Counterclaim, was not ventilated at the trial at all or raised orally.  In the plaintiff’s written opening submission, there was a brief mention of reflective loss but no discussion at all^[51]. In the written closing submission, the impression was given that the point of reflective loss was abandoned, as §§77 and 78 of the Re-amended Reply and Amended Defence to Counterclaim were described as “Now Redundant”^[52]. It is understandable that the judge did not find it necessary to address any question of reflective loss in his judgment.

118.  Be that as it may, Mr Barlow argued on appeal that the defendants’ claim is barred by the principle against reflective loss.  His “core contention” was that “the only potential claimant was the WOFE”, but the WOFE was not made a party to the action and the 1^st defendant was not entitled to enforce any reflective rights or entitlements of non-parties, whether this be the WOFE or the Fund II investors.  There is no discretion involved where the principle barring claims for reflective loss applies as this is a matter of principle^[53]. It may be applied not only where the company had the right to sue but also where it had declined or failed to sue^[54], and it can apply to other types of remedies including an account of profits^[55].

119.  Mr Barlow further contended that the judge had no jurisdiction to try or determine any claim because the defendants, after they had abandoned all their counterclaims for damages shortly before the trial, had never pleaded any claim for an account for loss of profits on behalf of anyone, including the Fund II investors who were absent.

120.  The last point may be dealt with shortly, as it is plainly incorrect.  The defendants did plead in §61.5 of the Amended Counterclaim that the plaintiff is liable to account to them for all benefits which he has received by reason of the breaches of fiduciary duties owed to the defendants and Fund II.

121.  It is for the plaintiff to establish the applicability of the principle on reflective loss.  The starting point is that the present case involves layers of different partnerships and entities governed by different laws.  At the very least, there are three limited partnerships governed under Cayman Islands law (the 1^st defendant, the Fund General Partner, and Fund II), a Cayman Islands company (My Show) and a PRC company (the WOFE).  It is incumbent on the plaintiff to (1) specifically identify which entity or entities he says would have a reflective claim; and (2) specifically establish a claim available to such entity or entities to recover the same loss.  As Peter Gibson LJ said in Shaker v Al-Bedrawi [2003] Ch 350 at §83:

“As the Prudential principle^[56] is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant’s action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts …”

122.  At the hearing below, the plaintiff did not make clear which entity or entities he alleged would have a reflective claim.  Even on appeal, whilst Mr Barlow submitted that “the only potential claimant was the WOFE” for the purpose of reflective loss, he also sought to argue that the defendants’ claims are reflective of the loss of the Fund II investors.

123.  It seems to me there are formidable difficulties in his way.  I agree with Mr Manzoni that the plaintiff should not be allowed to raise the point of reflective loss on appeal, as this court cannot be satisfied there is no reasonable possibility that the state of the evidence bearing upon the contention would have been materially more favourable to the other side if the point had been taken at the trial (Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356 at §38; Lehmanbrown Ltd v Union Trade Holdings Inc & Ors, HCMP 977/2015, 17 June 2015, §10).

124.  As submitted by Mr Manzoni, there are at least three issues that required further factual investigation at the trial stage:

(1) The applicable law for the reflective loss principle

125.  The WOFE is a PRC company.  The law of the place of incorporation may or may not recognise the reflective loss principle. No expert evidence was adduced in the court below on PRC law in this respect.

(2) Whether the reflective loss principle is applicable to entities that are not companies

126.  Fund II is not a company but an exempted limited partnership registered under the laws of the Cayman Islands.  Although evidence on Cayman Islands law was adduced below, there was no evidence on the applicability of the principle of reflective loss to an exempted limited partnership as this issue was not properly raised.  In a similar situation concerning a Jersey family trust, the Court of Appeal declined to permit the defendants to argue on appeal for the first time the reflective loss principle as even under English trust law, the application of this principle in relation to trusts is unclear on the authorities, and is fact-specific (Zhang Hong Li & Ors v DBS Bank (Hong Kong) Ltd & Ors [2018] HKCA 435 at §§27 and 28).

(3) Whether the WOFE has a claim and the relief applicable

127.  Insofar as the plaintiff has now raised that the losses are reflective of the WOFE’s losses, the plaintiff had not attempted to specify what cause of action the WOFE would have against him, and what relief would be available.  These may well be matters of PRC law and it is for the plaintiff to establish that the claim of the WOFE is available on the facts.  Quite apart from the fact that the judge did not find that fiduciary duties were owed by the plaintiff to the WOFE (contrary to Mr Barlow’s contention), no evidence on PRC law was adduced below on all these pertinent matters.

128.  It would be clearly unfair to allow the plaintiff to raise reflective loss on appeal. It is simply too late for the plaintiff to run this point.

D5. Order for accounts

129.  Mr Barlow submitted that the judge had become functus officio when he made the order in the Accounts Ruling on 26 June 2018, after the order for the judgment of 14 February 2018 was drawn up and sealed on 21 March 2018.  As a result, the judge had no jurisdiction to vary or enlarge the order for the judgment.

130.  This is a bad point. By the order for the judgment, the plaintiff was required to “account to the 1^st Defendant for any profit that the Plaintiff made as a result of the investment made by [KPCB] under the [Xinrui Investment Agreement] dated 24 August 2007”.  It was provided that “all necessary enquiries and accounts be taken to identify and establish such profits made by the Plaintiff.  For that purpose, the 1^st Defendant shall have liberty to seek directions for taking of such accounts.”  The judge had thereby reserved the issue of detailed directions that may be given for the taking of the accounts.  Pursuant to the order for the judgment, on 12 March 2018 the defendants made an application to seek directions for the taking of the accounts.  The doctrine of functus officio plainly has no application to this situation.

131.  A number of objections were taken in respect of this part of the order in the Accounts Ruling by which the plaintiff was required to provide an account of “all income, including salary, fees, dividends and other remuneration whether by way of “Capital Distribution” and/or “Carried Interest” or similar payments received by P and/or entities owned and/or controlled by P down to 31 December 2012 (“the end date”) from (i) [KPCB] and its subsidiaries, affiliates and related entities …; and (2) [KV] and its subsidiaries, affiliates and related entities…”.

132.  The plaintiff contended that the order complained of exceeded the permissible bounds for an order to account.  He stressed that his obligation is “to account for profits which have been made in breach of fiduciary duty, not simply to account for profits in the abstract.” (Snell’s Equity (33^rd ed), §7-055)  He should not be made to account for more than he actually received as a result of his breach.  One of the matters required of him was to account for “all income, including salary”. Other money he earned such as the salary he agreed with KPCB before they made the Xinrui investment was not within the scope of the judgment order, as this was not profit he derived from KPCB’s investment made under the Xinrui Investment Agreement.

133.  He also complained that the order impinged upon his rights, the rights of KPCB and the rights of subsidiaries, affiliates and related entities of KPCB and KV, requiring them to disclose to the defendants (who are trade competitors) wide-ranging commercially sensitive information that was outwith the judgment and the Xinrui counterclaim. Furthermore, other than the plaintiff, the other entities had not been given any opportunity to be heard.

134.  I reject all the above contentions.  Similar submissions had been made before the judge^[57].

135.  The plaintiff was not asked to account for profits in the abstract.  He was ordered to account for any profit he made as a result of the investment made by KPCB under the Xinrui Investment Agreement. The Accounts Ruling made clear that given the plaintiff’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, it is appropriate to make “an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary”^[58]. It is with such considerations in mind that the order was made, so that the court can properly ascertain whether and to what extent those monies could be regarded as falling within the scope of his duty to account and disgorge, instead of merely relying on the assertion made in his affirmation of 25 March 2018.

136.  As for monies received including “salary, fees, dividends and other remuneration”, assuming that his salary was agreed with KPCB before they made the Xinrui investment, if his salary was enhanced as a result of the profits he brought in by such investment, this may well be a profit attributable to his breach of fiduciary duty for which he would come under a duty to account.

137.  The judge was mindful of the issue of confidentiality raised by the plaintiff and addressed this by imposing an undertaking on both defendants that any further information provided by the plaintiff pursuant to the order to account will be kept confidential save for its use in these proceedings, which use shall be the sole use to which the information will be put^[59]. There is nothing in the point about the impingement of third party confidentiality.

D6. The “abuse” case

138.  The plaintiff alleged at the trial that the defences raised by the defendants were used to stave off the plaintiff’s application for summary judgment and the counterclaims were advanced disingenuously in abuse of the process of the court.  Mr Barlow complained that the judge had failed to address these contentions in his judgment.

139.  This complaint has no merit and may be dealt with succinctly.

140.  Mr Manzoni referred us to the observations made by the judge during the oral closing submissions of Mr Barlow, in which the judge stated that despite the “pejorative averment, in very colourful language, as to the lack of substance of good faith in the defence”, Mr Barlow “did not make it the least bit clear that [he was] advancing a cause of action for which [he was] seeking a remedy” and the plaintiff could not make a claim for damages for the abuse of process of the court without an amendment^[60]. There was no application to amend the writ and the statement of claim.  The judge is wholly justified in ignoring the “abuse” case.

141.  Furthermore, the judge had indicated that he did not find the defendants’ case was abusive when he refused to order indemnity costs against the defendants in the Costs Ruling.  He rejected the suggestion that the defendants had “knowingly manufactured a set of false, spurious allegations of misconduct” against the plaintiff and he could see “no proper basis for concluding that their counterclaim was anything other than a genuine claim”^[61]. There is no basis to interfere with the judge’s findings of fact.

D7. Appeal against costs order

142.  The plaintiff contended that the costs order was “perverse and incorrect” in these respects: the judge declined to order costs against the 2^nd defendant when the 2^nd defendant had failed on all of its counterclaims; and he was wrong to order the plaintiff to pay 65% of the costs of the defendants in respect of their account of profits counterclaim when the 1^st defendant had failed on four out of the five heads of counterclaim.

143.  The judge gave detailed reasons in the Costs Ruling for rejecting the above contentions^[62]. I have considered his reasons and find no basis at all to interfere with his exercise of discretion.

D8. Conclusion in the plaintiff’s appeal

144.  There is no merit in any of the grounds of appeal advanced by the plaintiff.  I would dismiss his appeal with an order nisi that he should pay the defendants’ costs of this appeal, with a certificate for two counsel.

E. THE DEFENDANTS’ CROSS-APPEAL

E1. The issues in the defendants’ cross-appeal

145.  As mentioned at the outset of this judgment, the three main issues raised by the defendants in their cross-appeal to challenge the judgment on the plaintiff’s claim are as follows:

(1) The proviso (iv) point

146.  Whether on the proper construction of proviso (iv) to article 7.1(c) of the ALPA, this provision was triggered when the plaintiff’s status as a limited partner was terminated so as to reduce his entitlement to Carried Interest by 95%.

(2) The clause 8 point

147.  Whether on the proper construction of clause 8 of the SA the defendants are debarred from advancing their claim that the plaintiff’s applicable percentage is that set out in proviso (iv) to article 7.1(c) of the ALPA and that his applicable percentage is locked at 51.78%.

(3) The misrepresentation point

148.  Whether the plaintiff was obliged to disclose his breaches of duty to the defendants prior to entering into the SA or upon commencement of his breaches and by not so disclosing was guilty of an implied misrepresentation that there was no wrongdoing to disclose such that the defendants are entitled to rescind the SA, alternatively to recover damages against the plaintiff the effect of which is to cancel out the plaintiff’s claim.

E2. The proviso (iv) point

149.  I have earlier summarised the effect of proviso (iv) to article 7.1(c) of the ALPA.  I now set out the provisions in full in article 7.1(a) to (c):

“ARTICLE VII

INACTIVE PARTNERS; REALLOCATION

7.1 Designation and Rights of an Inactive Partner.

(a) Designation of Inactive Partner. Unless the General Partner determines otherwise, a Limited Partner shall become an ‘Inactive Partner’ under any of the following circumstances (each, a ‘Trigger Event’): from and after the earliest date on which such Limited Partner (i) ceases to be an employee of the Fund Manager or its Affiliates or to perform services for the Partnership, Fund, the Fund Manager or their Affiliates (on behalf of the Fund) for any reason (whether because of such Limited Partner’s death or Disability); (ii) gives notice of such Limited Partner’s voluntary termination as an employee of the Fund Manager or its Affiliates; (iii) is given notice of such Limited Partner’s involuntary termination as an employee of the Fund Manager or its Affiliates; or (iv) commits any act (or failure to act) constituting Cause.

(b) Rights of Inactive Partner. Except as may otherwise be provided by the Act, whenever the act, vote, consent or decision of one or more of the Limited Partners is required or permitted pursuant to this Agreement (including any vote of the Investment Committee), an Inactive Partner shall not be entitled to perform such act, to participate in such vote (unless the Partnership is in dissolution and such vote is made pursuant to section 15 of the Act) or consent or to make such decision; and except as provided herein such act, vote, consent or decision shall be performed, tabulated or made as if such Inactive Partner were not a Partner.

(c) Amendments to Points on the Partnership Register. Unless otherwise agreed to by the General Partner, upon the occurrence of a Trigger Event such Inactive Partner’s Points Allocation shall, in each case, be adjusted by the General Partner to equal the applicable percentage (as set forth below, the ‘Applicable Percentage’) of such Points Allocation. The General Partner shall, without the consent of the Limited Partners, amend the Partnership Register to adjust the Points Allocation of the relevant Inactive Partner set forth on the Partnership Register accordingly, and the amount by which such Inactive Partner’s Points Allocation is reduced pursuant to this Section 7.1 shall be forfeited and reallocated pursuant to Section 7.2.

Applicable Percentages for a Limited Partner who becomes an Inactive Partner:

If the Trigger Event occurs:	Applicable Percentage
Before the first anniversary of the latter of (x) the Final Closing and (y) the Initial Date of such Limited Partner:	0%
Thereafter but before the fourth anniversary of the Initial Date of such Limited Partner:	20.24% plus 1.66% for each month after the first anniversary of the Initial Date of such Limited Partner
On or after the fourth anniversary of the Initial Date of such Limited Partner:	80.08% plus 0.83% for each month after the fourth anniversary of the Initial Date of such Limited Partner
On or after the sixth anniversary of the Initial Date of such Limited Partner:	100%

provided that:

(i)   if a Limited Partner becomes an Inactive Partner due to voluntary resignation within three years from the Initial Date, the Applicable Percentage for such Inactive Partner shall be equal to 0.7 multiplied by the Applicable Percentage otherwise provided above,

(ii)   if a Limited Partner becomes an Inactive Partner due to death or Disability, the Applicable Percentage for such Inactive Partner shall be increased by 20%,

(iii)   if a Limited Partner becomes an Inactive Partner due to Termination without Cause, the Applicable Percentage for such Inactive Partner shall be increased by (A) the Pro Rata Daily Amount (if any) and (B) an additional 5%,

(iv)   if a Limited Partner becomes an Inactive Partner due to Termination with Cause, the Applicable Percentage for such Inactive Partner shall be equal to 0.05 multiplied by the Applicable Percentage otherwise provided above,

(v)   to the extent proceeds from a Portfolio Investment are actually received by the Fund prior to such Limited Partner being deemed to have become an Inactive Partner (but not to the extent proceeds are actually received thereafter), the Applicable Percentage with respect to Carried Interest Distributions relating to such Portfolio Investment shall be 100%, and

(vi)   in the case of each of items (ii) and (iii) above, in no event shall the Applicable Percentage for a Limited Partner that has become an Inactive Partner exceed 100%;

and provided, further, that if a Limited Partner is terminated for Cause and it is ultimately determined by a court of competent jurisdiction in a decision that is not subject to appeal that the event due to which the determination of Cause was made either did not occur or was not of a nature as to constitute Cause, then for purposes of this Agreement it shall be deemed that such Limited Partner was terminated without Cause as of the date on which such Limited Partner was terminated for Cause, and such Limited Partner will receive within 30 days (or as soon as practicable thereafter) all amounts such Limited Partner would have received had such Limited Partner been terminated without Cause on such date; and provided, finally, that the General Partner, in its sole discretion, may deem the Initial Date of any Limited Partner for the purposes of this Agreement to fall on a date earlier than such Limited Partner’s actual Initial Date (but in no event earlier than January 1, 2005).  Nothing in this Section 7.1(c) shall affect any distribution already made or required to have been made to a Limited Partner prior to such Limited Partner becoming an Inactive Partner.”

150.  The expression “Termination with Cause” in proviso (iv) to article 7.1(c) is not defined in the definitions provision in article 11, nor does this expression appear anywhere else in the ALPA.  In the further proviso to article 7.1(c), the expression “terminated for Cause” appeared twice.

151.  The only expressions relating to the termination of a limited partner that have been defined in article 11 are “Termination for Cause” and “Termination without Cause” and they read as follows:

““Termination for Cause” shall mean the involuntary termination of a Limited Partner’s employment with the Fund Manager or its Affiliates for Cause.

“Termination Without Cause” shall mean the involuntary termination of a Limited Partner’s employment with the Fund Manager or its Affiliates without Cause.”

152.  The defendants contended that albeit the plaintiff’s termination as a limited partner as a result of the SA was a consensual arrangement and not an “involuntary termination” at the time, if, following the consensual termination it was discovered that the plaintiff had been guilty of conduct amounting to “Cause”, his employment would have been terminated “with Cause” within proviso (iv).  In other words, the word “with” does not connote a causal connection between the termination and “Cause”.  So if a limited partner’s conduct fell within “Cause”, it would not matter that the Cause was discovered after the termination and was not causally linked to it.

153.  The judge rejected this contention. He held that it is clear the word “with” in proviso (iv) was used interchangeably with the word “for” and the definition of “Termination for Cause” in article 11 must be taken to be the applicable definition for “Termination with Cause” in proviso (iv). The word “for” plainly signifies a causal connection between the termination and the Cause so that the termination must at the time it occurs be by reason of conduct amounting to “Cause”.  And the termination of the plaintiff’s employment is not covered by the definition of “Termination for Cause” because that termination was not involuntary but voluntary in the nature of an agreed termination as provided for in the SA^[63].

154.  Mr Manzoni argued that the judge was wrong to assume that the definition of “Termination for Cause” in article 11 is the applicable definition for “Termination with Cause” in proviso (iv).  He submitted there is no basis to ignore the difference in wording.  Whereas “Termination for Cause” is defined to mean an involuntary termination, “Termination with Cause” has not been defined in the ALPA so it may not be involuntary.  The word “with” (as opposed to “for”) in ordinary English language does not import a sense of causation.  Instead, the word “with” requires the co-existence of two elements, “termination” and “Cause”.  This interpretation is more consistent with the clear commercial purpose behind proviso (iv), which is to prevent a wrongdoing limited partner from reaping the full benefit of his otherwise entitlement.  To interpret proviso (iv) as being limited to “Termination for Cause” would lead to the absurd result that whether this provision will achieve its objective is wholly dependent on the vagaries of whether the partnership can discover the existence of Cause and on that basis terminate the wrongdoing limited partner, or whether the partner succeeds in hiding his wrongdoing for sufficient time for him to resign first.  An interpretation which flouts common sense should be disfavoured.  And the provision should be interpreted so far as possible in such a manner as not to allow a wrongdoer to take advantage of his own wrong (Lewison on The Interpretation of Contracts (6^th ed) §7.10).

155.  I agree with the judge there is no ambiguity about proviso (iv) and it is clear that the word “with” was used interchangeably with “for” in article 7.1(c) so that the definition of “Termination for Cause” in article 11 must be taken to be the applicable definition for “Termination with Cause” in this proviso. 

156.  The expression “Termination with Cause” is not defined in article 11.  As mentioned earlier, the only expressions defined in article 11 relating to the termination of a limited partner are “Termination for Cause” and “Termination without Cause”.  If “Termination with Cause” is intended to have a meaning different from that of “Termination for Cause” and is another kind of situation relating to the termination of a limited partner, there is no good reason why this third situation should not be defined in article 11.

157.  Other than in proviso (iv), the expression “Termination with Cause” does not appear anywhere else in the ALPA.  “Termination without Cause” is mentioned in proviso (iii).  If “Termination with Cause” in proviso (iv) is not construed as equivalent to “Termination for Cause”, it is difficult to see why there should be a definition of “Termination for Cause” in article 11, as the expression “Termination for Cause” does not appear in any other part of the ALPA.

158.  In the further proviso to article 7.1(c), the phrase “terminated for Cause” appeared twice.  This reinforces the view that the expression “Termination with Cause” in the earlier proviso being proviso (iv) is meant to be read consistently as “Termination for Cause”, as otherwise there would be no mention of “Termination for Cause” in article 7.1(c) and no need for making the further proviso. 

159.  Mr Barlow also made a valid point that the key words in proviso (iv) read: “if a Limited Partner becomes an Inactive Partner due to Termination with Cause”.  The defendants’ interpretation that no causal connection between the termination and “Cause” is required does not agree with the natural meaning of the key words.

160.  The judge has further considered proviso (iv) on the assumption there were an ambiguity and he construed this provision strictly in favour of the plaintiff applying the contra proferentem rule.  Mr Manzoni argued that the judge was wrong to assume a contra proferentem construction against the defendants.  I do not think there is any need to apply this rule of construction as I am satisfied there is no ambiguity in the meaning of proviso (iv).

161.  Nor do I agree with Mr Manzoni that the clear commercial purpose of proviso (iv) must be to prevent a wrongdoing limited partner from reaping the full benefit of his otherwise entitlement.  That seems to be looking at the matter back to front.  As Lord Neuberger stated in Arnold v Britton [2015] AC 1619 at §19: “… commercial common sense is not to be invoked retrospectively.  The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.”  Lord Neuberger further emphasised at §20: “… while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.”  This point was also made by the judge when he rejected the defendants’ construction in §81 of the judgment. 

162.  The defendants’ case of relying on proviso (iv) to reduce the plaintiff’s entitlement to Carried Interest by 95% fails in limine, as they are unable to bring themselves within this proviso.

E3. The clause 8 point

163.  The plaintiff adopted a belt and braces approach in relying on clause 8 of the SA to contend that there should be no reduction of his entitlement. I will set out this provision again for convenience:

“Vesting: Joe will have an additional nine months of vesting from November 1, 2006 with respect to his carry interest or points in SAIF Partners II LP. With this additional vesting Joe’s final vested percentage will be 51.78%. The non-vested portion of the additional nine months vesting shall continue to be vested as long as Joe has compliant [sic] with the provisions and obligations under the [sic] this separation agreements [sic]. For the avoidance of doubt, there shall be no recourse or reduction once the carry interest is vested.”

164.  The judge held in favour of the plaintiff on the construction of this provision in one short paragraph at §62.  He held that the natural and ordinary meaning of this provision is that once the additional nine months of vesting has vested (giving a final vested percentage of 51.78%), that final percentage is forever after fixed and cannot be reduced.

165.  In view of my conclusion on the proviso (iv) point, it is not strictly necessary to consider clause 8.  In deference to counsel’s submissions, I will deal with this succinctly.

166.  Mr Manzoni argued along the same lines of the plaintiff’s trial counsel in that the last sentence in clause 8 simply means that if breaches of the SA are discovered within the additional nine-month period of vesting, the defendants are entitled to cease any further additional vesting but those parts of the already vested additional vesting will not be affected.  Clause 8 concerns only the additional vesting, it is not free-standing and does not have the more general effect as interpreted by the judge of precluding the operation of proviso (iv) in reducing the plaintiff’s percentage entitlement under the ALPA.

167.  I am inclined to agree with the judge on the natural and ordinary meaning of the last sentence of clause 8.  Furthermore, the judge has held that the meaning of the last sentence of clause 7 (“The provisions in this memo supersede any previous agreements entered into between Joe and SAIF.”) is that the amendments made by the SA to the ALPA as it applies to the plaintiff supersede those original ALPA provisions from the date of the SA.  Reading clause 8 with clause 7, it is clear that article 7.1(c) of the ALPA has been superseded by the amendments made to it by clause 8 of the SA, including the proviso (iv) to article 7.1(c), bearing in mind that the plaintiff departed on mutually agreed terms in the SA and not by involuntary termination.  The effect of this is that proviso (iv) has been superseded by clause 8 from the date of the SA, and the last sentence of clause 8 makes clear “there shall be no recourse or reduction once the carry interest is vested”.

E4. The misrepresentation point

168.  This was advanced as a fall-back argument if the plaintiff should fail on the two earlier points on construction.

E4.1 The proper scope of the argument on the misrepresentation point

169.  Mr Manzoni sought to argue on appeal that the plaintiff was under an obligation to disclose his breaches of duty prior to entering into the SA on 11 December 2006 or upon commencement of his breaches, some of which could be after the SA was entered into.  The plaintiff’s failure to disclose his breaches amounted to an implied representation that there was no wrongdoing to disclose and was false, as there were wrongdoings on the part of the plaintiff and his subordinates.  Had the defendants known of the wrongdoings, they would not have entered into the SA.  The defendants are therefore entitled to rescind the SA, alternatively to recover damages which would extinguish the plaintiff’s claim in its entirety.

170.  He further argued that even if the plaintiff was actively involved in serious discussions with Zhou Yang about investing in an entity to develop the Diandao technology only around late January 2007 (as the judge had found) and not prior to 11 December 2006, the defendants are still entitled to damages for misrepresentation which will cancel out a part of the plaintiff’s additional entitlement under clause 8 of the SA^[64].  This is because the additional entitlement is conditional, as clause 8 provides: “The non-vested portion of the additional nine months vesting shall continue to be vested as long as Joe has compliant [sic] with the provisions and obligations under the [sic] this separation agreements [sic].” As the plaintiff had breached the positive duty to disclose his and his subordinates’ wrongdoings, he impliedly represented he had no relevant wrongdoing to disclose, which was false.  In reliance on this misrepresentation, the defendants did not exercise their right to stop the vesting of the additional entitlement.  They therefore suffered losses to the extent of any additional vesting that should have ceased and such losses will cancel out part of the plaintiff’s claim.

171.  It is important to see how the claim for misrepresentation was pleaded in the Re-amended Defence and Counterclaim.  I quote the relevant paragraphs:

“A summary of the 1^st and 2^nd Defendants’ case

30. For the reasons pleaded below, the 1^st and 2^nd Defendants say as follows:

…

30.3  Alternatively, the Plaintiff was under an obligation, before the Separation Agreement was entered into, to disclose the said breaches to the 1^st and 2^nd Defendants and his failure to do so constituted a misrepresentation which enables the 1^st and 2^nd Defendants to rescind the Separation Agreement and/or to claim damages.”

“63. Further or in the alternative, in circumstances where

63.1 the Separation Agreement was a compromise; and/or

63.2 the Plaintiff, as pleaded above, was in a fiduciary relationship with the 1^st and 2^nd Defendants and Fund II:

63.3 the Plaintiff owed a duty to the 1^st and 2^nd Defendants to disclose to them the various acts of misconduct as to which complaint is made above.

64. The Plaintiff did not disclose to the 1^st and 2^nd Defendants the various acts of misconduct, and accordingly impliedly represented that there were no such acts of misconduct.

65. For the reasons above, that implied misrepresentation was false in that there were acts of misconduct which had been carried out by the Plaintiff, namely those pleaded above.

66. The 1^st and 2^nd Defendants would not have entered into the Separation Agreement if they had known about the said acts of misconduct by the Plaintiff, and so were induced by the Plaintiff’s said misrepresentation into entering the Separation Agreement.

67. Accordingly, further or alternatively to their case based upon mistake, the 1^st and 2^nd Defendants seek an order that the Separation Agreement be set aside for misrepresentation and/or damages. …

68. If, contrary to the 1^st and 2^nd Defendants’ primary contentions, the Separation Agreement is not void ab initio^[65] and/or cannot be set aside for misrepresentation, then there have in any event been breaches of the Separation Agreement by the Plaintiff:

68.1 Notwithstanding that the Plaintiff was under an obligation thereunder not to solicit “LPs” (meaning potential investors) for investment in Newco before the earlier of the Second Closing or 1 April 2007 the Plaintiff breached such obligation and, in this regard, the 1^st and 2^nd Defendants repeat paragraphs 47 and 53 above^[66].

68.2  As is apparent from Clause 8 of the Separation Agreement, the Plaintiff’s entitlement to an increased percentage of Carried Interest was conditional on his performing his obligations thereunder, and so his failure to perform the same has the consequence that, in any event, he has no entitlement to any such increased percentage. …”

(Emphasis supplied)

172.  Quite clearly, the argument sought to be run on appeal that the plaintiff should be deprived of part of the additional entitlement on the basis of implied misrepresentation there was no relevant wrongdoing to disclose so that the defendants did not exercise their right to cease vesting the additional entitlement had not been pleaded.  One can also see from the exchanges with the judge during the oral closing submissions of the defendants’ trial counsel that for the purpose of the claim in misrepresentation, the defendants’ case was confined to the plaintiff’s failure to disclose breaches that occurred before the SA was made^[67]. On the principles of Flywin Co Ltd v Strong & Associates Ltd and Lehmanbrown Ltd v Union Trade Holdings Inc & Ors, the defendants cannot be permitted to raise this unpleaded point on appeal. 

173.  So for the purpose of the misrepresentation point, as regards wrongdoings that the plaintiff was alleged to be under a duty to disclose, such wrongdoings must be confined to those that occurred before the SA was made on 11 December 2006.  With the scope of the arguments confined in this manner, the only wrongdoings relied on by the defendants as mentioned in Mr Manzoni’s submissions are (1) the plaintiff’s failure to ensure effective financial control over the US$2.5 million loan made on 15 September 2006; and (2) the plaintiff’s deleted reference to the phrase “planning new generation of targeted online advertising” from the power point slides prepared for an advisory board meeting of the 1^st defendant which took place around 19 November 2006.

174.  Before I turn to the arguments relating to the US$2.5 million loan and the amendment of the power point slides, I will deal with the submissions made regarding the basis and scope of the duty to disclose said to be imposed on the plaintiff.  

E4.2 The basis and scope of the duty to disclose

175.  In the pleading^[68] and the arguments made at the trial^[69], the duty to disclose was put on two bases: general release and fiduciary relationship. 

176.  The first basis is premised on the SA being a general release by the defendants of any claim they may have had against the plaintiff founded on “Cause”, relying on Bank of Credit and Commerce International SA v Ali & Ors [2002] 1 AC 251, in particular §§32 and 69, which read as follows:

“Thus far I have been considering the case where both parties were unaware of a claim which subsequently came to light. Materially different is the case where the party to whom the release was given knew that the other party had or might have a claim and knew also that the other party was ignorant of this. In some circumstances seeking and taking a general release in such a case, without disclosing the existence of the claim or possible claim, could be unacceptable sharp practice. When this is so, the law would be defective if it did not provide a remedy.” (per Lord Nicholls)

“My Lords, I think that this argument presses the principle in Bell v Lever Brothers Ltd too far. It was not a case which concerned a general release. A transaction in which one party agrees in general terms to release another from any claims upon him has special features. It is not difficult to imply an obligation upon the beneficiary of such a release to disclose the existence of claims of which he actually knows and which he also realises may not be known to the other party. There are different ways in which it can be put. One may say, for example, that inviting a person to enter into a release in general terms implies a representation that one is not aware of any specific claims which the other party may not know about. That would preserve the purity of the principle that there is no positive duty of disclosure. Or one could say, as the old Chancery judges did, that reliance upon such a release is against conscience when the beneficiary has been guilty of a suppressio veri or suggestio falsi. On a principle of law like this, I think it is legitimate to go back to authority, to Lord Keeper Henley in Salkeld v Vernon, 1 Eden 64, 69, where he said: ‘no rule is better established than that every deed obtained on suggestio falsi, or suppressio veri, is an imposition in a court of conscience.’ ” (per Lord Hoffmann)

177.  The first basis was rejected by the judge for these reasons^[70]. The SA was not a general release but an agreement governing a range of matters arising out of the plaintiff’s departure from SAIF Partners, of which his applicable percentage was just one of the matters agreed upon. Moreover, the SA did not release the plaintiff from all claims arising out of the misconduct relied on by the defendants, as is evidenced by the counterclaim for damages brought by the defendants for losses alleged to have been suffered by reason of such misconduct.  The judge was also far from satisfied that the plaintiff knew that either of the defendants had a claim against him to reduce his applicable percentage under article 7 of the ALPA and was not prepared to infer that he had such knowledge as no suggestion of knowledge was made in his cross-examination.

178.  The judge must be right in rejecting the first basis. Mr Manzoni criticized the judge as taking an “unduly narrow” approach and that it is wrong in principle to require disclosure of only those wrongdoings constituting or relevant to “Cause”.  I do not think his criticism is justified.  The judge was addressing the first basis which is premised on there being a general release from any claim the defendants may have had against the plaintiff founded on “Cause”.  Looked at in this context, the pertinent question to ask must be whether the plaintiff had knowledge that the defendants had a claim to reduce his applicable percentage.  Whether the duty to disclose should cover all wrongdoings and not just those relevant to “Cause” if the duty is founded on a different basis is another consideration.

179.  The second basis for the duty to disclose is founded on the duty owed by the plaintiff to the defendants as a fiduciary.  The judge did not deal with this in his judgment. Having been referred by the defendants’ trial counsel to Conlon & Anr v Simms [2008] 1 WLR 484 at §130, he expressed the view in his exchanges with counsel that the fiduciary would have a duty to disclose only where there is fraud^[71], and there is no fraudulent breach of duty as regards the plaintiff.

180.  Mr Manzoni referred us to the judgment of Arden LJ (with whom Mummery LJ and Holman J agreed) in Item Software (UK) Ltd v Fassihi & Ors [2005] 2 BCLC 91, which was not cited in the court below. Arden LJ rejected the submission that the duty of a director (who is subject to fiduciary duties) to disclose his own misconduct is limited to fraudulent misconduct (§§21, 26 and 44). This is how the duty to disclose was expounded in §41:

“For my part, I do not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it. So to hold would lead to a proliferation of duties and arguments about their breadth. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company. This duty of loyalty is the ‘time-honoured’ rule: per Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 at 21. The duty is expressed in these very general terms, but that is one of its strengths: it focuses on principle, not on the particular words which judges or the legislature have used in any particular case or context. It is dynamic and capable of application in cases where it has not previously been applied but the principle or rationale of the rule applies. It reflects the flexible quality of the doctrines of equity. As Lord Templeman once put it ‘Equity is not a computer. Equity operates on conscience …’ (Winkworth v Edward Baron Development Co Ltd [1987] BCLC 193 at 197; [1986] 1 WLR 1512 at 1516).”

181.  Arden LJ acknowledged in §44 that the only reason it could be said that the duty of loyalty does not require a fiduciary to disclose his own misconduct is that “it has never been applied to this situation before”, but did not regard this a good objection to the application of the fiduciary principle.

182.  Of the cases that considered Item Software, these two decisions are of note: Brandeaux Advisers (UK) Ltd & Ors v Chadwick [2010] EWHC 3241 (QB), Jack J; and GHLM Trading Ltd v Maroo & Ors [2012] EWHC 61 (Ch), Newey J.

183.  In Brandeaux Advisers, Jack J pointed out at §47 that Item Software has not been “without its critics”, and mentioned as an example Palmer’s Company Law which referred to its finding as “controversial”.  In GHLM Trading at §193, Newey J remarked that Item Software arguably breaks new ground in treating a fiduciary duty as “prescriptive rather than merely proscriptive” and suggested that its result can be justified also by subsequent legislation being section 172 of the Companies Act 2006.

184.  On the basis that a director’s duty of good faith under section 172 can potentially require him to disclose misconduct, Newey J went on to make the points (at §§194 and 195) that the duty of good faith focuses on a fiduciary’s subjective intentions and it can be incumbent on a fiduciary to disclose matters other than wrongdoing as the “single and overriding touchstone” is the duty of a director to act in what he considers in good faith to be in the best interests of the company and there is no reason to restrict the disclosure that can be necessary to misconduct.  “Were a director subjectively to consider that it was in the company’s interests for something other than misconduct to be disclosed, he would, it appears, commit a breach of his duty of good faith if he failed to do so.”

185.  Mr Manzoni placed particular reliance on the above dicta of Newey J.  He submitted that the scope of the duty to disclose is broad and extends to knowledge of “potential or preliminary wrongdoing” as these would be matters that would be in the interests of the company (or the partnership in this instance) to be disclosed.  He contended that the judge was wrong in drawing a distinction between the plaintiff merely “entertaining the possibility” of investing in a company which Zhou Yang intended should take forward the Diandao technology, and the plaintiff having a “settled intention” to join in Zhou Yang’s plans for Xinrui^[72], as the scope of the duty to disclose is not so restricted and it is not necessary to establish that the plaintiff had “crossed the Rubicon” to found liability.

186.  This line of argument was not mentioned in the defendants’ pleading or raised at the trial and it would not be fair to allow this to be run for the first time on appeal in contravention of the Flywin principle.  I do not propose to deal with it.  The defendants should be confined to their case advanced at the trial that the duty to disclose relates to the acts of misconduct complained of in their pleading, being the breaches of fiduciary duty and the wrongdoings constituting “Cause”. 

187.  I will assume for the time in the defendants’ favour that it is incumbent on a fiduciary to disclose his own misconduct.  If the two instances of misconduct relied on to found the claim in misrepresentation cannot be established on the facts (as the judge had found), it is not necessary to decide on the scope of the duty imposed on a fiduciary to disclose his own misconduct.

E4.3 The US$2.5 million loan

188.  The judge found that in no respects was the plaintiff’s involvement in the making of the US$2.5 million loan by My Show to Zhou Yang a breach of fiduciary duty^[73]. There is no challenge against this finding of fact.

189.  That leaves the holding that no “Cause” was established as regards the plaintiff’s involvement in the making of this loan.

190.  The judge held that the plaintiff took insufficient account of Mr Yan’s insistence that effective financial controls be imposed on the WOFE and he thereby exposed My Show and Fund II to an unnecessary risk that the proceeds of the loan would not be spent properly in furtherance of the WOFE’s business.  He also found that the plaintiff failed to honour his assurance that he would devote sufficient time to the supervision of the My Show investment^[74]. Nevertheless, “Cause” was not established because the judge held against the defendants’ interpretation of “Cause” in article 11.1 and the covenants in article 3.2 of the ALPA.

191.  “Cause” was defined in article 11.1 to mean a failure by the Limited Partner “to comply in a material respect with or a material breach … of any … policy” of the defendants, or a failure by the Limited Partner “to comply with or breach by such Limited Partner of any provision of Section 3.2”.

192.  In respect of the failure to comply with or breach of “policy”, the judge held that “policy” in the definition of “Cause” connotes a statement calling itself a “policy” issued by the General Partner, the Partnership, the Fund General Partner, the Fund Manager or any of their affiliates^[75]. There are examples of a statement of this nature being the Policy Against Trading on the Basis of Inside Information, the Policy Against Trading Stock of Restricted Companies, and the Policy of Confidentiality which the plaintiff covenanted in his contract with SAIF BJ to sign and comply with^[76].  No such statement calling itself a policy was issued as regards the tight financial control to be maintained over the portfolio companies.  The defendants only relied on various emails issued by Mr Yan in February 2006 before the My Show SPA was made^[77]. The judge reasoned that a partner should have little difficulty in identifying what “policy” was caught by the definition of “Cause”.  If this was not contained in a statement calling itself a “policy” issued by an appropriate body, the limited partner could well be uncertain as to what was within or without the reach of “policy” in the definition of “Cause”^[78].

193.  Mr Manzoni submitted that the judge had in effect relied upon the contra proferentem principle, which ought not to apply as there is no factual basis to support the judge’s assumption that the ALPA was proffered to the plaintiff on a “take it or leave it basis”^[79]. He contended that it is contrary to commercial sense to restrict the meaning of “policy” to require a formal written document, as it would be inconsistent with the flexible and rapid decision-making necessary in the investment funds context. The judge should have found that the emails issued by Mr Yan amounted to “policy” within the definition of “Cause”.

194.  Quite apart from the contra proferentem rule which the judge applied, he had construed the meaning of “policy” in the definition of “Cause” with regard to the overall purpose of the provision in article 7.1 in which “Cause” appears, namely that it is part of a set of provisions under which a limited partner’s points allocation can be forfeited^[80].  Given the context of the relevant provisions, I think he is right to adopt a restrictive meaning for the word “policy”.

195.  As for the failure to comply with any of the covenants in article 3.2 as amounting to “Cause”, the covenant relied on by the defendants for this purpose is the second sentence in article 3.2(d), which provides that each limited partner shall not conduct himself “in a manner adversely affecting the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates”. The defendants contended that the ambit of this sentence is wide enough to cover the plaintiff’s conduct in failing to ensure effective financial controls over the US$2.5 million loan.  The plaintiff was therefore in breach of the covenant in article 3.2(d) and this constituted “Cause” as defined.

196.  The judge rejected the defendants’ construction. He held that read in the context of article 3.2(d) as a whole, the conduct prohibited by the second sentence is conduct that is injurious to the reputation of the adumbrated entities and not conduct that causes them direct financial loss or direct operational difficulties.  In other words, this sentence is equivalent to an obligation not to bring the listed entities into disrepute by, for example, publicly “bad mouthing” them, or by expressing offensive and/or highly controversial views, or by disreputable personal behaviour that comes into the public domain and thereby reflects badly on the listed entities.  This wording does not apply to the plaintiff’s involvement in the US$2.5 million loan.^[81]

197.  Mr Manzoni submitted that the judge was in error in adopting such a restrictive interpretation and the judge would appear to have taken into account that the heading of article 3.2(d) is “Non-Disparagement”. Under article 12.4, it is provided that the headings of articles are inserted for convenience of reference only and shall not be deemed to constitute a part or affect the interpretation.

198.  I do not think counsel’s criticism is justified. As mentioned, the judge had construed article 3.2(d) as a whole.  The first sentence relates to the disclosure of information that “reflects negatively upon or otherwise disparages” the listed entities.  The second sentence relates to “conduct … in a manner adversely affecting” the listed entities.  Read in the context of the first sentence, the conduct prohibited in the second sentence should be conduct injurious to the reputation of the listed entities. The judge is clearly right in his interpretation of this provision.

199.  I uphold the judge’s finding that no “Cause” was established as regards the plaintiff’s involvement in the making of the US$2.5 million loan.  The first of the two instances of misconduct relied on to found the claim in misrepresentation cannot be established on the facts.

E4.4 The amendment of the power point slides

200.  The plaintiff deleted the reference to the phrase “planning the new generation of targeted online advertising” from the power point slides prepared by Mr Zhao for an advisory board meeting of the 1^st defendant around 19 November 2006.  The defendants alleged that this was done for the purpose of concealing his involvement in Zhou Yang’s scheme of competing with the WOFE through developing the Diandao technology of Ding Jun.

201.  The judge was not satisfied that by 19 November 2006, the plaintiff was resolved on seeking to invest on his account in an entity separate from the WOFE that would develop Ding Jun’s technology. Instead, he found that from a date that preceded 6 February 2007 by at least a few days, the plaintiff was in serious discussion with Zhou Yang about investing in a venture independent from the WOFE in which Zhou Yang would have interest, the business of that venture being to utilise Ding Jun’s technology.  It was “after a deal of anxious consideration” that the judge found the plaintiff did not amend the slides to conceal a scheme in which he would invest in an entity competing with the WOFE^[82].

202.  The defendants sought to challenge this finding of fact.  It was submitted that although the judge had recorded the plaintiff’s explanation for the deletion^[83], he failed to consider the veracity of that explanation and failed to take into account all relevant considerations.  The judge had already ruled that the plaintiff had put up a false case that he only knew about the Diandao or Point Advertising technology in April 2007, and only decided to seriously discuss investment in May or June 2007^[84]. The plaintiff’s explanation should not be believed in light of the evidence given by the defendants’ witnesses, Mr Zhao and Li Meng, whom the judge found to be truthful and credible.

203.  I do not consider there is any proper basis to interfere with the judge’s finding of fact.  The judge had declined to infer that the amendments to the slides were made for the purpose as alleged by the defendants after a thorough review of the evidence.  The question of weight is a matter for the trial judge.  It cannot be said that he was plainly wrong in so finding.  The defendants have failed to establish the only other instance of misconduct relied on to found misrepresentation. 

E5. Conclusion in the defendants’ cross-appeal

204.  For the reasons given above, the defendants fail on all the grounds of appeal.  Their cross-appeal must be dismissed.  I would make an order nisi that the defendants are to pay the plaintiff’s costs in the defendants’ cross-appeal, with a certificate for two counsel.

Hon Barma JA:

205.  I agree with the judgment of Kwan VP.

Hon Au JA:

206.  I agree with the judgment of Kwan VP.

Annexure