DIETER HEINZ STEIMECKE AND OTHERS v. ARMIDALE LTD. AND OTHERS

CACV 80/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 80 OF 1999

(ON APPEAL FROM HCA 11299 OF 1997)

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J U D G M E N T

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Mayo J.A. (giving the judgment of the Court):

1. This was an appeal from a judgment of Sears, J. who in turn was hearing an appeal from the decision of Master Lok. Sears, J. allowed the appeal and set aside the leave which the Master had given to serve the proceedings out of the jurisdiction on D3 which is a German Company.

2. Very briefly P1 and another German gentleman Peter Schmidt were the beneficial owners of a group of companies which was known as the MBO group.

3. The ultimate holding company was D4 a British Virgin Islands Company. It controlled D1 a Hong Kong company which in turn controlled two MBO subsidiaries, one of which dealt in Hong Kong with sourcing and manufacturing products and the other with distribution and sales in Germany. The products dealt with were electrical and medical goods and the annual turnover was of the order of HK$25 - 30 million.

4. For the purposes of this application it is not necessary to describe the relationship and functions of the different plaintiffs. Suffice it to say that P2 and P3 were companies controlled by P1.

5. P1 had the benefit of a service contract with the MBO group. One of the terms of the contract was that he was entitled to receive 1/2% of the turnover of the group.

6. In January 1994 P1 and Mr. Schmidt decided to divest themselves of their interest in the MBO group and transfer their shares to senior employees in the group. D2 was the most prominent of these employees and he represented their interests.

7. The consideration for this transfer was that P1's 1/2 % commission should continue to be payable and that a company warehouse in Germany should continue to be used.

8. So far as the commission was concerned steps were taken to reinforce P1's position. It was agreed that the ongoing agreement should continue until 1996. Thereafter it was agreed that there should be a "no cancellable" consultant contract which would entitle P1 to continue to receive his 1/2% commission indefinitely.

9. In addition to this it was decided to amend the Memorandum of Association of D1 so as to record this agreement. Unfortunately the parties drafted the relevant documentation without the assistance of professional advice.

10. The resolution purportedly to amend the Memorandum of Association was at p. 124 of the Appeal bundle:

"SHAREHOLDER MEETING

ARMIDALE LIMITED

17-2-94

PRESENT :	D. Steimecke - old Shareholder, representative H. Verheul - new Shareholder, representative
CHAIR :	Heinrich Verheul
BUSINESS :	It was resolved that the attached agreements will form a part of the company memorandum and that the future Shareholders and/or Directors cannot vote or cancel these agreements or change the Companies and its subsidiaries business structure without the prior written consent of Peter Schmidt (until 1-3-1998) and Dieter Steimecke or its successor.

The Resolution as represented by Heinrich Verheul for all the future Shareholders was adapted (sic). This forms an integral part of the Company and its subsidiaries.

Signed	Signed
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Henrich Verheul for the new Shareholders	Dieter Steimecke for Peter Schmidt and Dieter Steimecke, the old Shareholders

	Signature (illegible)
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	Witness

Attached schedule A & B"

11. This resolution was apparently filed at the Companies Registry. Mr. Westbrook who represented the plaintiffs before us informed us that for the purposes of this application he placed greater reliance upon this resolution than he did upon the agreement earlier referred to.

12. The reason for this being the reference in the resolution to the prohibition against changing the companies or their subsidiaries' business structures without the prior written consent of P1.

13. In June 1994 the employees through D2 entered into negotiations with D3 with a view to selling their shares in the Companies. These negotiations were protracted and it appears to be common ground that at least in the initial stages P1 was consulted concerning his interests. Indeed there were discussions concerning his willingness to accept a 30% deduction sought by D3 in the amount he was entitled to receive. He did not agree to this.

14. On 8th December 1994 virtually all the shares in the Hong Kong MBO were transferred to the German MBO. Later the shares were transferred to D3. This was done without the consent of P1. In addition to this D1 gave P1 notice terminating his service contract.

15. On 24th February 1995 D1 entered into a sale and purchase agreement with the German MBO. The consideration for the sale was stated to be:

"The total purchase price for the (partial) share of the Seller shall be DM 1, -- (in words: German Mark one). The Seller hereby confirms to have received such purchase price from the Buyer already prior to the notarisation of this Agreement.

As a further consideration, the Buyer shall pay an annual share in the turnover of MBO Far Est (Hong Kong) Ltd. at the rate of 0.5% thereof to Mr. Heinrich Verheul, the Managing Director for the time being of MBO Far East (Hong Kong) Ltd., by way of a promise made hereby in favour of third parties.

The amount of the turnover decisive therefor shall be according to the audited annual accounts; its due date shall, every year, be two weeks after the audit thereof. The share in the turnover shall, for the first time, commence on 01.01.1995 and shall end automatically on 31.12.2005. It shall be limited to a maximum share in the turnover in the amount of HK$3,750,000, irrespective of the aforementioned duration. An adjustment of such maximum limit due to inflation is expressly ruled out."

16. The effect of these transactions was to strip D1 of its assets and thus its capability to pay the commission which had been agreed to be paid to P1.

17. It can be added that D3 did not pass on to P1 the commission referred in the agreement and no "no cancellable" consultant contract was ever offered to him.

18. In the present proceedings P1 is claiming damages against the defendants to compensate him for the loss he has suffered.

19. P1 seeks to formulate his claim in two ways against D3. The first is for procuring a breach of contract and the second is for conspiracy. So far as the present application is concerned reliance is mainly placed upon the first. In this connection Mr. Westbrook referred us to Chapter 23 on Economic Torts in the 17th Edition of Clerk & Lindsell on Torts, Sweet & Maxwell 1995:

"23-24 The wrongful procurement. In D. C. Thomson & Co. Ltd v. Deakin it was established that there are three distinct forms of wrongful interference which can give rise to liability under this heading: (1) direct inducement; (2) other direct intervention; and (3) indirect procurement. The phrase 'direct inducement' covers the case where the intervener, by himself or his agent communicates pressure to the mind or person of one of the contracting parties; and 'indirect procurement' refers to the case where, without doing any of these things, he procures or attempts to procure a situation which will or may result in a breach of contract.

23-25 (1) Direct inducement. The most obvious form of direct inducement is active persuasion or enticement of the contracting party himself. In such a situation, it matters not whether it was the inducer or the inducee who spoke the first word. But four types of direct inducement have been identified: (a) persuasion, procurement or inducement of the contract breaker; (b) dealings inconsistent with the contract; (c) direct intervention against the contract or a party to it; (d) imposition of physical restraint on a party. (Types (c) and (d) fall within form (2) below.) It is not enough for actions of the defendant to have an 'influence' on the mind of someone to whom they were not directed (for example where leaflets are distributed to the public urging them not to buy the produce of suppliers who had dismissed employees; there was no direct interference with any contracts made with the nearby supermarkets by the suppliers). A direct communication from one person to another will, of course, suffice, for example in the form of an ultimatum; and it will make no difference that this communication is made through the instrumentality or agency of a third person. When a federation sends out communications to its members asking them to transmit them to the contracting party, the federation has effected direct persuasion of that party, for the members are used merely as a kind of post box. What is needed is a persuasive communication; but, given that, the mere presence of a silent persuader (a picket) has been held to be sufficient."

20. Mr. Westbrook submitted that on the basis of the material which had been before Sears, J. he was able to meet the requirements of this Tort and consequently the application for service out of the jurisdiction complied with Order 11 rule 1 (f) of the Rules of the High Court.

21. Mr. Carolan for D3 contended that D3 had not in any way been instrumental in bringing about any breach of any contract which had been entered into. He accepted that D3 had been aware of P1's interest. However as could be seen from the consideration stated in the 24th February 1995 Agreement his clients had specifically provided for this and had agreed to make the relevant payments to D2.

22. We do not consider that this is necessarily an answer to P1's complaint. The fact remains that he was never consulted in the matter and he certainly never agreed to it. It also appears to be the case that notwithstanding D3's efforts the commission payable has not found its way into P1's pocket. The restructuring without his concurrence if established undoubtedly constituted a breach of the contract.

23. Mr. Carolan also raised various technical objections. He referred to the fact that the shares which were referred to in the 10th January 1994 Agreement were D4's shares. D4 had never entered into a service contract with P1. For the purposes of this application we are satisfied that the correct approach to adopt is to pierce the corporate veil and have regard to who was in fact the alter ego.

24. Mr. Carolan also submitted that Sears, J. had been correct when he had found that the agreement to enter into the "no cancellable" agreement amounted to no more than a "declaration of hope'. This would appear to be beside the point. The fact remains that the restructuring proceeded without P1's permission and this would constitute a sufficient breach of contract to bring the matter within the ambit of the Torts referred to in Chapter 23 of Clerk and Lindsell.

25. A further issue which was raised by Mr. Carolan was the question as to whether the plaintiffs had established that the damages which had been sustained had been so sustained in Hong Kong. There is evidence that P1 is now the holder of a Hong Kong Identity Card and has leased a flat in Hong Kong. He is the alter ego of P2 and P3 and is the person entitled to receive the commission. In these circumstances there is an arguable case that the damages were sustained in Hong Kong.

26. For leave to be given to serve the process out of the jurisdiction all that P1 has to establish is that he has a good arguable case. For the reasons we have given we are satisfied that he is able to establish this. The result of this is that this appeal must succeed. We accordingly restore the order of the Master and make an order nisi that the plaintiffs are to have the costs of this application and the appeal before Sears, J.