TSOI KEUNG WING v. CHAN CHI KIN JOHNNY

DCCJ953/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 953 OF 2014

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J U D G M E N T

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A. INTRODUCTION

1.  The plaintiff (“Mr Tsoi”) and the defendant (“Mr Chan”) are respectively Regional Director and Senior Regional Director of Manulife (International) Limited (“Manulife”).

2.  Mr Tsoi seeks recovery of HK$516,800 from Mr Chan pursuant to an alleged oral agreement. 

3.  Mr Chan denies that there was a legally binding oral agreement, and counterclaims for a sum of HK$129,200 that Mr Chan says he had paid Mr Tsoi under a mistake.  Mr Tsoi says Mr Chan had paid him this sum in compliance with his contractual obligations.

B. UNDISPUTED BACKGROUND FACTS

B.1 Mr Chan joined Manulife in 2009

4.  Mr Tsoi and Mr Chan have known each other for about 20 years through working in the insurance field. In the beginning of 2009, Mr Tsoi, who was then working for Manulife as a regional director, was engaged in discussions with Mr Chan, who was then working in Fortis Insurance Company (Asia) Limited (“Fortis”), about the latter joining Manulife.  In the discussions, Mr Chan expressed the wish that his good friend from Fortis, Mr Andy Tse (“Mr Tse”), should join Manulife along with him.

5.  Mr Tsoi knew that Mr Chan and Mr Tse were both experienced and senior insurance executives having a large pool of agents working for them. He therefore very much wanted both of them to join Manulife as they would potentially earn him in the long run substantial “over-riding” commissions from premiums paid by clients of the agents working under or introduced by him in the region of millions of dollars.

6.  However, for Mr Tse to leave Fortis and join Manulife, monies would first need to be raised to enable him to repay loans of around HK$30 million made to him by Fortis.  Sufficient funds were subsequently raised by Manulife in making a number of financial arrangements with Mr Tsoi, Mr Chan and Mr Tse. One of the financial arrangements was Mr Tsoi taking an interest-free personal loan of HK$3.8m (“Loan”) from Manulife to be repaid in 10 years. The Loan however would in fact be used by Mr Tse to repay Fortis.

7.  Similar financial arrangement was also made between Mr Chan and Manulife.

8.  Mr Chan and Mr Tse later resigned from Fortis and joined Manulife by each of them entering into an “Agency Management Agreement” dated 2 November 2009 with Manulife.

B.2 Mr Tsoi and Mr Chan entered into an oral agreement    

9.  Upon agreeing to take the Loan from Manulife, Mr Tsoi was concerned with two matters.  One was Mr Tsoi’s fear that he might leave Manulife within a short time of Mr Chan’s joining Manulife.  Should that happen, Mr Tsoi envisaged that the amount of commissions he might earn within a short time of Mr Chan’s joining would not be sufficient to enable him to repay the Loan upon leaving Manulife.

10.  Another concern of Mr Tsoi was the tax implications of the repayments of the Loan.  Since the arrangement for the Loan repayments would be by Manulife deducting every month a sum of $31,666 from his earnings (commissions and bonuses), Mr Tsoi would still need to pay profits tax on the deducted monthly sum of $31,666.  Furthermore, irrespective of a reduction of a total amount of $380,000 every year off his gross earnings, Mr Tsoi would not be able to claim the deducted amount of $380,000 as a tax deduction.  Mr Tsoi believed that he would effectively suffer, in a sense, a “tax loss” during the 10 years when he would be required to repay the Loan.

11.  Whilst recognizing the likely long-term benefit Mr Tse might potentially bring to him, Mr Tsoi however also took the view that Mr Tse should indemnify him for the liabilities and taxes losses mentioned above, which would be caused by the Loan Mr Tsoi had personally accepted from Manulife for Mr Tse’s use.  Since Mr Tse was Mr Chan’s close friend and former colleague, Mr Tsoi took up the matter of indemnity with Mr Chan.

12.  Discussions between Mr Tsoi and Mr Chan took place at around the beginning of December 2009. Since Mr Chan wanted to “avoid causing distress to[1]” Mr Tse, he agreed (“Oral Agreement”) to indemnify Mr Tsoi by :

(a) Repaying the Loan for Mr Tsoi in the event that Mr Tsoi were to leave Manulife within 12 months of Mr Chan’s joining Manulife (“LR Agreement”).

(b) Indemnifying Mr Tsoi every year for tax losses arising from the annual Loan repayments in the sum of $380,000 (“TL Agreement”).

B.3 Execution of the agreement for the Loan

13.  On 9 December 2009, Mr Tsoi entered into a “Personal Loan Agreement” (“Loan Agreement”) with Manulife after the Oral Agreement was reached with Mr Chan. According to the Loan Agreement, the total amount of the Loan was to be paid by Manulife by the drawing of a cheque payable to Fortis. Mr Tsoi was required to repay the Loan by 120 equal instalments (of $380,000 per year for 10 years) with the first instalment to be paid in January 2010 by Manulife deducting it from Mr Tsoi’s commissions and/or bonus payments due to him.

14.  A loan agreement bearing the same date and in identical terms as the Loan Agreement was also executed between Manulife and Mr Chan.

B.4 Email record of the Oral Agreement

15.  On 10 December 2009, the day after Mr Tsoi had signed the Loan Agreement; Mr Tsoi emailed to Mr Chan, and copied to his senior, Miss Kareen Chow (“Miss Chow”), a record (“Email”) that Mr Tsoi had prepared of the Oral Agreement.

16.  The subject of the Email was stated to be “Agreement” and the title description “Re: Agreement of the Special Loan Agreement for [Mr Tse]”.  Since the subject matter of this dispute is only concerned with the TL Agreement, I will only set out the contents relevant to the TL Agreement. 

“According to the Special Loan (Amount HK$3,800,000) for [Mr Tse] repay [Fortis], details of the agreement from [Mr Chan I.D. …] as follow;

1) …….

2) This is to agree from [Mr Chan] that he will be responsible if there’s any tax that bring from this Special Loan (Amount HK$3,800,000) for my tax account, amount will be base (sic) on my tax statement.

3) Ms. Kareen Chow will (sic) as a witness for this issue.

Remarks:  Official Agreement documents will be signed from [Mr Chan] later.”

(Emphasis is added).

17.  Mr Chan replied by email (“Reply Email”) on the same day (without copying to Miss Chow), confirming that he “agreed” (with the contents of the Email) and further reminding Mr Tsoi to prepare the “official agreement” by a lawyer.  Mr Tsoi forwarded the Reply Email to Miss Chow for her information.

18.  Since Mr Tsoi did not have confidence in his English, he therefore wanted (as indicated in the Remarks of the Email) to prepare a lawyer-drafted “official agreement” to embody the terms of the Oral Agreement that he believed he had recorded in detail in the Email.

19.  After these email exchanges, a factual dispute arose as to whether the TL Agreement was varied at the end of December 2009 as Mr Tsoi alleged. This dispute will be discussed in Section D.1 below.

20.  In the event Mr Tsoi had not prepared any “official agreement” as indicated in the Email as he was busy. It was not until June 2010 that an agreement purportedly setting out the agreed terms of the Oral Agreement was prepared by Mr Chan’s solicitors. It is to this agreement I now turn.

B.5 Agreement prepared by Mr Chan’s solicitors

21.  As Mr Tsoi had not prepared a lawyer-drafted “official agreement”, Mr Chan decided to follow up the matter himself. On 11 June 2010, Mr Chan emailed a completed agreement (“Draft Agreement”) prepared by his solicitors to Mr Tsoi for his comment. 

22.  The background of the Loan Agreement can be found in the recital of the Draft Agreement. It recites, among others, Mr Chan’s agreement to compensate Mr Tsoi for “the loss he suffers by reason of his inability to claim tax reduction [sic] over the repaid amount(s)” and indemnify [Mr] Tsoi “for his liabilities to Manulife for repayment of the [Loan] in the event that [Mr] Tsoi’s agency agreement with Manulife shall be terminate [sic] for any reason within 12 months from date of the agency agreement”.

23.  The terms of the Oral Agreement are set out in three separate clauses in the body of the Draft Agreement. Apart from clause 2 and the dispute about how the date of 31 December 2010 (“Cut-Off Date”) in clause 3 came about,  clause 1 (that provides for Mr Chan’s agreement to compensate Mr Tsoi for his losses by reason of his inability to claim tax deductions, and clause 3 (that provides for Mr Chan’s agreement to indemnify Mr Tsoi for all loss in respect of his liability to repay the Loan in the event of Mr Tsoi’s leaving Manulife on or before  the Cut-Off Date) are not controversial.   Thus, clause 2 is set out in full below.

24.  Clause 2 of the Draft Agreement provides:

“2. To calculate [Mr Tsoi]’s said loss, [Mr Tsoi] shall on an annual basis produce his tax return and tax demand note to [Mr Chan] for review and calculation. [Mr Chan] shall within 3 months after receiving a copy of [Mr Tsoi]’s tax demand note pay [Mr Tsoi] a sum equal to the difference between (1) the tax payable by him under the tax demand note and (b) the tax which would be payable by him for the relevant tax year had the total amount(s) of repayment of the [Loan] during the tax year been allowed as tax deduction.”

25.  After Mr Tsoi had received the emailed Draft Agreement, he replied by email on 13 June 2010 that he would later call Mr Chan to discuss clause 2 of the Draft Agreement. The contents of the telephone discussion between the parties on 13 June 2010 are controversial, and will be discussed in Section D.2.2 below.

B.6 Mr Chan made payments in 2011 and 2012

26.  In January 2011 and February 2012, Mr Chan made payments (respectively “1st Payment” and “2nd Payment”) by cheques each in the sum of $64,600 after demands by Mr Tsoi’s secretary, Miss Yuen, for compensation for Mr Tsoi’s tax losses arising from the Loan repayments.

27.  In January 2013, despite similar demands having been made by Miss Yuen, Mr Chan refused to make any further payment. After several email exchanges between Miss Yuen and Mr Chan’s assistant, Miss Yuen was told that Mr Chan would not make any payment purportedly under an advice by the management of Manulife that Mr Chan had no liability to compensate Mr Tsoi.

28.  This was followed by a number of correspondence exchanges between the solicitors for the parties, and eventually the institution of these proceedings.

C. EVALUATION OF EVIDENCE AND SUMMUARY OF THE UNDISPUTED FACTS

29.  Mr Lo was counsel for Mr Tsoi and Mr Chan was represented by Mr Tsui, counsel.

30.  Apart from Miss Yuen, whose evidence (see §§ 26 & 27 above) is not disputed, Mr Tsoi and Mr Chan are the only witnesses. Ultimately, the court’s main task, as both counsel also agree, is to resolve the factual disputes between the two protagonists.

31.  It is also agreed that, in assessing the inherent probability of the parties’ evidence, the court can take into account contemporaneous documents: see Yu Jiang & Anor v Cheng Wai Lin Rosalind & Ors, HCA 2562/2005, unreported, 11 June 2014 at §18.  The Email and the Reply Email are contemporaneous documents I should have regard to in assessing the parties’ credibility.

32.  Looking at the evidence in the round, I find Mr Tsoi a credible and reliable witness. He is firm and straightforward, and his evidence was not shaken in cross-examination. I am satisfied that Mr Tsoi’s assertions are by and large consistent with the contemporaneous documents.

33.  On the other hand, I am not impressed by Mr Chan.  I find that Mr Chan has, as will be seen from the analyses below, a tendency to shift his evidence and change his stance when the situation suits him. I find that his assertions are most of the times at odds with the parties’ conduct at best, and at worst damaging to his case.

34.  Unless otherwise specified, where there is conflict in the parties’ evidence, I prefer the evidence of Mr Tsoi to the evidence of Mr Chan.

35.  According to the undisputed evidence, I am satisfied that before Mr Tsoi’s signing of the Loan Agreement on 9 December 2009, the partes entered into the Oral Agreement consisting of the LR Agreement and the TL Agreement.

36.  There can also be no dispute that the Email is a contemporaneous record of the detailed terms of the Oral Agreement whereas the Reply Email is a contemporaneous record of Mr Chan’s agreement to the terms of the Oral Agreement Mr Tsoi had set out in the Email.   

37.  Thus, before an alleged variation to the TL Agreement (which will be discussed in Section D.1) at the end of December 2009, the TL Agreement, according to the detailed terms of the TL Agreement  recorded in the Email, was subject only to a condition of requiring Mr Tsoi to provide tax statements. It is noted that nowhere in the Email or the Reply Email am I able to find the  alleged condition of the signing of a written agreement as Mr Chan has averred in §6(1) of the amended defence and counterclaim (“Amended Defence”). This alleged condition is one of the core issues that I will later discuss in Section E.

D. THE DISPUTED FACTS AND FINDINGS

D.1 Was the TL Agreement varied as Mr Tsoi asserted?

38.  It was averred by Mr Tsoi that after the parties had entered into the Oral Agreement, he later became concerned about the requirement of the production of the tax statements provided in the TL Agreement. Such requirement, he demurred, would not only be troublesome but would probably invade his privacy. Mr Tsoi wanted this requirement to be dispensed with and believed that Mr Chan would be amenable to the dispensation that would likely save much of the parties’ time. For Mr Chan, like him, was equally if not more, busy with his work.

39.  Around the end of December 2009, Mr Tsoi stated that an oral agreement (“Variation Agreement”) was reached between him and Mr Chan to vary (“Variation”) the TL Agreement by dispensing with the requirement of the production of the tax statements, and by fixing the amount of compensation Mr Chan would be required to pay at  $64,600 each year (for 10 years). Mr Tsoi explained that the fixed amount was calculated by applying the 17 percent, being the ceiling profits tax rate during that period, to $380,000, the total sum Manulife would be deducting from Mr Tsoi’s earnings every year as repayments for the Loan.

40.  According to Mr Chan, neither the discussion on the Variation nor the Variation Agreement ever took place.

41.  On balance, I prefer the evidence of Mr Tsoi to Mr Chan’s evidence. I consider the Variation Agreement makes sense for busy managers like Mr Tsoi and Mr Chan. Not only would the dispensation have likely saved their time, the fixed amount $64,600 also provides a sound and certain pre-estimate of the parties’ contractual rights and liabilities. 

42.  On the evidence, Mr Tsoi and Mr Chan were both high income earners. Their annual gross earnings were believed to be in the region of not less than $5 million. As such, $64,600 would have likely been regarded as, colloquially speaking, small change in relation to the amount of their incomes.  

43.  Mr Chan seems to have suggested in his evidence that the use of the 17 per cent to fix the compensation would be unfair to him because Mr Tsoi might not always be assessed on profits. He stated that he had previously opted for personal assessment as advised by his tax accountant, in which case, the applicable tax he would have been charged for was around 15 or 15 ½ per cent rather than the 17 per cent for profits tax.

44.  Mr Chan’s suggestion about the probability that Mr Tsoi might be paying personal tax is obviously speculation. Rather, Mr Tsoi appeared to have been regularly assessed for profits and paid profits tax of around 17 per cent.   This is because the evidence shows that Mr Tsoi and Mr Chan appear to have received their earnings through their private companies, respectively in the names of Mega & Co and Johnny Chan & Co. This must have been done for the purpose of obtaining tax relief by allowing the companies to claim deductions for outgoings and expenses.

45.  In any event, the differences between the profits tax rate and personal tax rate are, even according to Mr Chan, only around 1 and ½ per cent to 2 per cent. The likely difference is so small that I believe the parties would have likely found it more convenient to fix compensation by using the most probable percentage for profits tax.

46.  Furthermore, the end of December 2009 must have been the busiest time for Mr Chan. This, in my finding, would have made Mr Tsoi’s proposed Variation more appealing than when if it had been made at a less busy period.  

47.  It has been established that the end of December is customarily the busiest month of the year in the insurance field. But for Mr Chan, he had to face the additional pressure of adjusting to Manulife. It appears that Mr Chan,  as evidenced by a solicitors’ bill (“Bill”)dated 22 June 2010 Mr Chan’s solicitors rendered to him, might have been dealing with some legal matters brought about by his change of employment.  The descriptions of work in items (A) and (B) of the Bill “non-disclosure of personal information” and “finalizing an agreement with Ivy Ho” [2] might have been about such matters.

48.  Obviously, the Bill was not intended for this purpose. It was merely to show that Mr Chan had paid the legal fees for the preparation of the Draft Agreement. No evidence has been given about exactly what legal services Mr Chan’s solicitors had provided to him during that period of time. Nonetheless, these two items that I have mentioned above incidentally shed some light in seemingly showing that around the end of December 2009, Mr Chan indeed had a lot on his plate.

49.  Mr Chan, in his oral testimony, had borrowed two Chinese proverbs to describe the intensity of the chaotic situation he faced after he joined Manulife: “兵臨城下” (literately translated as “rival soldiers arriving at the fortress”) and “兵荒馬亂” (literately translated as “soldiers panic and horses were confused”).   These proverbial expressions of Mr Chan’s situation around that time are probably an accurate portrayal of the myriad number of pressing issues Mr Chan was faced with. The Variation proposed by Mr Tsoi could not have, in my finding, come at a better time as it would have saved Mr Chan’s time.

50.  The absence of a written record of the Variation Agreement has been a subject of criticism. It has been contended that Mr Tsoi’s evidence on the Variation Agreement should be rejected for lacking any supporting evidence. After having considered very carefully Mr Tsoi’s explanation as to why no such record had been kept, I accept his evidence. I believe that due to his professed trust in Mr Chan at that time and his holding the view that the Variation was only a minor revision to the TL Agreement of which he had previously made a detailed record in the Email.  

51.  Another severe attack against Mr Tsoi’s credibility has been based on a demand made against Mr Chan for accelerated payment and payment for the Loan in the event of Mr Tse failed to meet his business quota set out in §§ 3 and 4 of a pre-action letter (“Pre-action Letter”) dated 7 June 2013 issued by Mr Tsoi’s solicitors. In making the demand in §3, Mr Tsoi’s solicitors had wrongly alleged that Mr Chan had agreed to pay Mr Tsoi any remaining balance of the 10 years’ tax loss compensation in the event of Mr Tsoi leaving Manulife before the expiration of the 10 years’ Loan repayment period; and in §4, an amount of the Loan pro-rata “to the refund of joining fee by” Mr Tse to Manulife. Mr Tsoi admitted that the allegations were among the many things the parties had discussed previously. However when the relationship with Mr Chan had broken down he wanted to demand for these payments in the Pre-action Letter.

52.  Is this incident about the wrong allegation having been made in the Pre-action Letter so serious that I should disbelieve Mr Tsoi’s evidence? Were there any reasons for Mr Tsoi to have made such a demand?  In order to evaluate the impact this incident has on Mr Tsoi’s credibility, I ought to examine the background against which the demand was made.

53.  From the events that have unfolded before and after the Pre-action Letter, I find that in 2013 the parties’ relationship had become increasingly strained. Mr Chan’s refusal to compensate Mr Tsoi by declining to make any payment in 2013 to Mr Tsoi perhaps heralded the worsening of the parties’ relationship for the months to come.

54.  The acrimonious relationship since the beginning of 2013 had evidently continued and been escalated by a letter dated 6 August 2013, which letter Mr Chan admitted having caused Manulife to issue. Irrespective of the outwardly neutral appearance in its tone and contents, Manulife’s letter was understood to be a message for Mr Tsoi that Mr Chan wanted Mr Tsoi to stop a misrepresentation Mr Chan alleged Mr Tsoi had made regarding Mr Tse and Mr Chan. Mr Chan wanted to state on record (by Manulife’s letter) that Mr Chan and Mr Tse, instead of having worked under Mr Tsoi as having been allegedly misrepresented, were in fact working within a team in the name of “SV Group”.

55.  I tend to believe that these upsetting events – Mr Chan’s refusal to make payment, and later Manulife’s letter - would have likely been the reason for Mr Tsoi in having irrationally conflated these two wrong demands with the other demands in the Pre-action Letter.  Given the backdrop against which the demands had been made, I consider that such conduct was quite out of character and should not be conduct that leads me to reject Mr Tsoi’s overall credibility.

D.2 The Draft Agreement

D.2.1 Before 11 June 2010: whether there was a discussion between the parties for obtaining Mr Tsoi’s personal particulars and his consent on the Cut-Off Date?

56.  It was alleged by Mr Chan that before he emailed the completed Draft Agreement to Mr Tsoi on 11 June 2010, he had telephoned the latter for his full name and identity card number, as well as to obtain his consent in agreeing to insert 31 December 2010 in clause 3 of the Draft Agreement as the cut-off date. Mr Tsoi denied such discussion had taken place.

57.  This dispute, strictly speaking, only touches on the peripheral matter of the parties’ credibility. Thus, this discussion will be brief.  On the whole, I reject Mr Chan’s evidence and prefer Mr Tsoi’s evidence. I am satisfied that Mr Tsoi did not have any discussion with Mr Chan before he received the Draft Agreement by email on 11 June 2010. 

58.  I find that it is more likely than not that Mr Chan or his solicitors, before 11 June 2010, might have already got hold of Mr Tsoi’s personal particulars from other agreements of the parties.  According to Mr Chan, the Draft Agreement was one of the several agreements that his solicitors prepared for the parties around that time. This seems to have been further borne out by item (F) of the Bill, which indicates that before the Draft Agreement was prepared, Mr Chan had instructed his solicitors to prepare an agreement for Mr Chan, Mr Tse and Mr Tsoi.

59.  As for Mr Chan’s allegation of obtaining Mr Tsoi’s consent to insert the date of 31 December 2010 in clause 3 of the Draft Agreement as a cut-off date for the LR Agreement, I believe that Mr Chan, without a need to discuss about the specification of the date with Mr Tsoi, should have been perfectly able to provide for the Cut-Off Date. This was because the date of 31 December 2010, being the last date of the 12 months’ period from the end of 2009 (around the time of Mr Chan’s joining Manulife), would have been almost the only logical date to have been specified in clause 3 of the Draft Agreement.

D.2.2 After 11 June 2010: what was agreed in the phone discussion on 13 June 2010and whether the Draft Agreement was delivered to Mr Tsoi afterwards

60.  Mr Tsoi stated that after he had received the Draft Agreement on 11 June 2010 by email, he was most concerned with the provisions of clause 2 of the Draft Agreement for they had the effect of repudiating the Variation that the parties have agreed in the earlier Variation Agreement.  Thus, he telephoned Mr Chan on 13 June 2010 to discuss with him about clause 2. In the telephone discussion (“Phone Discussion”), Mr Tsoi said that he pointed out the contradictions to Mr Chan, who then agreed to leave out clause 2 from the Draft Agreement.

61.  With Mr Chan’s consent to leave out clause 2 of the Draft Agreement, Mr Tsoi stated that the parties hinted in the Phone Discussion that the Draft Agreement would no longer be needed. This, Mr Tsoi explained, was the reason why he had heard no more about the Draft Agreement after the Phone Discussion and the reason why no copies of the Draft Agreement had ever been delivered to him for his execution.

62.  Contrary to Mr Tsoi’s assertions, Mr Chan stated that in the Phone Discussion, he had refused to accede to Mr Tsoi’s request for either revising or deleting clause 2. Hence, no amendment had been made to the Draft Agreement after the Phone Discussion.   After two copies of the Draft Agreement had been printed, Mr Chan signed them, put them in an envelope, on which he marked “Private & Confidential” before it was sealed and later delivered it to Mr Tsoi in person in a chance encounter during one lunch hour.  It was stated that Mr Chan had since mistakenly believed that Mr Tsoi had signed the copies of the Draft Agreement so delivered.

63.  I do not find Mr Chan’s assertions believable for a number of reasons. First, Mr Chan’s reasons for the preparation of the Draft Agreement do not appear to be genuine. Since it has been contended that the Oral Agreement was subject to the signing of a written agreement, it follows that Mr Chan should only be obliged to pay if and when a written agreement had been signed. It is therefore rather odd that Mr Chan had decided to undertake the task of preparing the Draft Agreement when it would only benefit Mr Tsoi rather than Mr Chan.  I believe that the real reason is likely to be for the purpose of allowing Mr Chan to change some of the agreed terms of the Oral Agreement and the Variation Agreement. Thus, I am satisfied that clause 2 of the Draft Agreement was inserted for that purpose.

64.  In fact, Mr Chan had given two different reasons for the preparation of the Draft Agreement. The earlier reason is found in §11 of his first witness statement, which reason being that he “did not wish to lay any seed for future argument”.

65.  The second reason was given in Mr Chan’s response to the question asked in cross-examining as to why Mr Chan had taken the trouble and expense to prepare the Draft Agreement when according to Mr Chan’s case he would have no obligation to compensate or indemnify Mr Tsoi had no agreement been signed. Mr Chan replied that it was his “moral obligation” to do so. 

66.  In my assessment, I believe that the reason stated in his first witness statement is likely to be part of the reason for the preparation of the Draft Agreement. About 6 months after joining Manulife, Mr Chan would have by that time been more settled and had more time to reflect upon the promises that he had given to Mr Tsoi.  By then, he had probably regretted having entered into the Oral Agreement, especially the TL Agreement, which obliges him to compensate Mr Tsoi for 10 years. I believe that Mr Chan decided then to take on the task himself rather than waiting for Mr Tsoi because he could then use that opportunity to backtrack from the Variation Agreement. Even though clause 3 of the Draft Agreement is not controversial, it is noted that its first part providing for Mr Chan to “procure Manulife to release [Mr ]Tsoi from all liabilities to repay the [Loan]”  seems to be a newly- added provision that is absent from the terms of the LR Agreement set out in the Email.

67.  I do not believe that Mr Chan was so charitable in regarding the preparation of the Draft Agreement as his “moral obligation”. Rather, the “moral obligation” he referred to, in my finding, is probably a “Freudian” slip of Mr Chan’s admission of his contractual obligations to indemnify and compensate for losses arising from Mr Tsoi’s taking of the Loan.

68.  Further, I find that Mr Tsoi’s evidence about the parties’ consent not to further pursue the execution of the Draft Agreement after the Phone Discussion is clearly corroborated by the non-execution of the Draft Agreement as opposed to Mr Chan’s uncorroborated assertions.

69.  Pertinently, Mr Chan’s account of the alleged personal delivery of his signed copies of the Draft Agreement to Mr Tsoi does not have any ring of truth. In my judgment, it is rather inexplicable for Mr Chan, a senior insurance manager, to deliver the documents to Mr Tsoi, who worked in the same building, in a chance lunch encounter “face to face” (“面對面”). Since the documents had been sealed, privacy would still be preserved even if they had been delivered by a member of his staff.  

70.  Not only have I found the alleged manner of delivery unbelievably odd, I further tend to believe that the alleged personal delivery is likely to be an afterthought.  In his first witness statement dated 5 November 2014, Mr Chan provided two possible modes of delivery of his signed copies of the Draft Agreement to Mr Tsoi- either by Miss Joey Chan, his personal assistant or himself personally. It was not until he later learnt that Miss Chan had in fact left Manulife did he then eliminate the delivery by Miss Chan in his supplemental witness statement of 16 February 2015.  In my judgment, had Mr Chan indeed personally handed the documents to Mr Tsoi as he had alleged, I should think that Mr Chan should have little difficulty in giving this account that he now gave at the earliest opportunity when he made his first witness statement.

D.3 Summary of findings

71.  Accordingly, I find the following facts are proved:

(1) Around the end of December 2009, the parties had entered into an oral agreement to vary the TL Agreement by dispensing with the requirement of the production of tax statements by Mr Tsoi and by fixing the amount of compensation at $64,600.

(2) Mr Chan’s undertaking to prepare the Draft Agreement was mainly to allow him to backtrack from the Variation Agreement rather than for a “moral obligation”.

(3) In the telephone conversation between the parties on 13 June 2010, Mr Chan had agreed to leave out clause 2 of the Draft Agreement and not to further pursue the entire Draft Agreement.

(4) No Draft Agreement or any copies of the same were delivered to Mr Tsoi for his signing.

E. THE AGREED ISSUES

72.  Based on the amended statement of agreed issues in dispute signed by the solicitors for both parties, the agreed issues are:

(1) Was there a legally binding Variation Agreement? 

(2) Were the 1st and 2nd Payments made in discharge of Mr Chan’s contractual obligations under the Variation Agreement? Or were they made by “mistake” as claimed by Mr Chan?

73.  Both counsel agree that if the court resolves Issue (1) in the affirmative, Mr Tsoi should get judgment otherwise Mr Tsoi’s claim should be dismissed.

74.  It follows therefore that Issue (2) stands and falls with the determination of Issue (1).

E.1  Issue (1): Was there a legally binding Variation Agreement?

75.  Having found that the parties had entered into the Variation Agreement in late December 2009 by which Mr Chan agreed to compensate for Mr Tsoi’s tax losses by paying a fixed annual sum of $64,600 for a consecutive period of 10 years, the only remaining matter under this issue is the question of whether the Variation Agreement was legally binding.

76.  It is contended that the Oral Agreement is subject to a condition of the signing of a written agreement. Since no such agreement had been signed, Mr Tsui therefore argues that the TL Agreement (which forms part of the Oral Agreement) and its later variation, the Variation Agreement, are not legally binding.

77.  In further elaboration, Mr Tsui sought to add a number of sub-issues in the Annex attached to his written closing submissions even though the parties have already agreed to the two issues that I set out above. 

78.  Stripped of the repetitions of Mr Tsui’s list of sub-issues, the core argument Mr Tsui is advancing is that the court should not only determine whether the Variation Agreement has been made, it should also determine whether the Oral Agreement of which the TL Agreement forms a part and the Variation Agreement weresubject to a condition of the signing of a written agreement.

79.  Since the Oral Agreement seems to be the provenance for the TL Agreement and the Variation Agreement, I consider that it is sufficient for the court to deal with the question of whether the Oral Agreement was subject to the alleged condition of the signing of a written agreement.

80.  The main plank of Mr Tsui’s argument is based on the reference to “official agreement” in the Remark of the Email, which reference Mr Tsui contends confirms the parties’ intention that the Oral Agreement was subject to the signing of a written agreement to be prepared by a solicitor.

81.  A passage was also cited from an authority of the English Court of Appeal of Chillingworth v Esche [1924]1 CH 97 at 104 to support Mr Tsui’s argument that the Oral Agreement should be construed as a “subject to contract” agreement, and was unenforceable unless the condition (which was the signing of the written agreement in this case) was satisfied.

“It is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case there is no enforceable contract cither because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract." That dictum was referred to with approval by Lord Sterndale, and it has also been approved of in other cases. Parker J. gave a guide to the solution of the difficulty by saying that in each case it ought to be considered whether the words contained in such a document were intended to be a condition or term of the bargain, or whether they were intended to be merely the expression by the parties of a desire that a more formal contract should be drawn up of the terms of the contract which had in fact been already agreed upon.” (Per Pollock M.R.)

82.  Chillingworth is a case concerning the construction of a “subject to contract” agreement in a property transaction. It is trite that when an agreement is made “subject to contract” , it is normally regarded as incomplete until the terms of a formal agreement have been settled and approved by the parties.  The law does not recognize “a contract to enter into a contract”.

83.  Does the evidence placed before me support the construction Mr Tsui contended for? Which is, the Oral Agreement was subject to a condition or was a term of the parties’ bargain requiring the execution of a signed written agreement.  

84.  On the evidence, I am unable to construe the Oral Agreement as being “subject to contract” requiring the execution of a formal agreement.  In my judgment, when making a written record of the terms of the Oral Agreement in the Email, Mr Tsoi had clearly intended, as evidenced by Mr Tsoi’s use of the word “details” (which I have underlined in the passage quoted in §16 above), to set out a comprehensive record of the terms of the Oral Agreement. Nonetheless, words such as “subject to contract” or “subject to the condition of signing of a written agreement” or words to such effect had been absent from the detailed record set out in the Email.

85.  Indeed, if the Oral Agreement were to be conditional on the signing of a written agreement to be prepared by a solicitor, logistical matters such as the payment or sharing of legal fees would also have likely been recorded in the same Email. 

86.  Indeed, had such a condition been in fact intended, Mr Chan would have most probably in the Reply Email reminded Mr Tsoi of the omission of the alleged condition, especially that the alleged condition, as discussed above, was to the benefit of Mr Chan but not to the benefit of Mr Tsoi.

87.  Since the only express words are the reference to “official agreement” in the Email, Mr Tsui’s argument had to fall back on the proper construction of the words “official agreement”. He thus argues that the court should construe the words “official agreement” as a condition of the Oral Agreement. It is therefore contended that since no official agreement was signed, the Oral Agreement was not legally binding. 

88.  In Chillingworth, the Court of Appeal found the disputed conveyancing agreement was a “subject to contract” agreement because the agreement contained clear express words “subject to a proper contract to be prepared by the vendor’s solicitors”. Here, the Oral Agreement does not have any or similar expressions.  The reference to “official agreement”, as discussed in §18 above, was for the purpose of allowing  Mr Tsoi to arrange a solicitor to spell out the terms of the Oral Agreement that he had already recorded in the Email due to Mr Tsoi’s lack of confidence in his  English ability. 

89.  In my judgment, the reference to “official agreement” alone without other supporting evidence to show the parties had indeed intended to make the signing of a written agreement as a condition is insufficient for me to construe the Oral Agreement being subject to the condition Mr Chan contended. 

90.  My view can be further tested by examining the subsequent conduct of the parties after Mr Tsoi’s indication in the Email of wanting to prepare an “official agreement” for Mr Chan to sign.  As I have mentioned above, the proposed preparation of the “official agreement” was clearly for Mr Tsoi’s benefit (for the purpose of setting out the terms properly for his protection). Hence, Mr Tsoi had agreed to undertake the responsibility of the preparation of the “official agreement”.

91.  Were the “official agreement” intended to be a condition, the arrangement should have been the reverse, because the condition would have been for Mr Chan’s benefit as without the alleged condition being fulfilled, the Oral Agreement would be unenforceable.  Thus, the arrangement for the preparation of the agreement would have logically been made by Mr Chan rather than by Mr Tsoi. It therefore begs the question of why it was Mr Tsoi who had wanted to instruct solicitors to prepare an “official agreement” in the first place were those words meant to subject the Oral Agreement to the alleged condition.  Mr Chan’s later undertaking of the preparation of the Draft Agreement was not because it was done in pursuance of the alleged condition but rather, as I have found in Section D.3 above, to allow Mr Chan to backpedal from the Variation Agreement.

92.  In summary, I am satisfied that the Oral Agreement of which the TL Agreement forms a part represents the parties concluded negotiations and was a complete agreement without a term or a condition  subjecting it to the signing of a written agreement.   

93.  Having determined that that the Oral Agreement was legally binding, the question of whether the Variation Agreement was legally binding was moot, particularly since Mr Chan in the Amended Defence (at §10) has only  pleaded a bare denial without putting forward a positive case when pleading to the Variation Agreement Mr Tsoi averred in his statement of claim (at §8). Mr Chan should be bound by his pleading and precluded from raising at trial a further contention of it being subject to the alleged condition (see O.18 r.13 of the Rules of the District Court, Hong Kong Civil Procedure 2015, Vol 1 §18/13/4,  §18/13/7 & §18/13/8). 

94.  For the reasons above, Issue (1) is resolved against Mr Chan. I am satisfied that there was a legally binding Variation Agreement.

E.2 Issue (2): were the 1st and 2nd Payments made in discharge of Mr Chan’s contractual obligations under the Variation Agreement? Or were they made by “mistake” as claimed by Mr Chan?

95.  Since I have determined against Mr Chan in Issue (1), it follows that Issue (2) should also be resolved against Mr Chan. I am firmly of the view that the 1^st and 2^nd Payments were not made by mistake but were for the discharge of Mr Chan’s contractual obligations under the Variation Agreement because of the following.

96.  First, as already discussed in §39 above, the sums of each of the 1^st and 2^nd Payments were not random numbers.  The amount of $64,600 was fixed by an ascertainable tax rate. Since the 1^st and 2^nd payments were both of the same amounts as the fixed compensation under the Variation Agreement; it is less likely that Mr Chan could have been mistaken when making these payments.

97.  Second, Mr Chan’s given reason for making the 1^st and 2^nd Payments is inconsistent with his asserted mistaken belief. The conduct of payments contradicts his allegation that his obligations to compensate Mr Tsoi were subject to the latter’s provision of the proof of the tax loss by the production of the tax statements.

98.  While Mr Chan’s explanation for the payments on the alleged belief that Mr Tsoi would later provide the tax statements as he had promised could be accepted as a valid reason for the 1^st Payment, it certainly cannot be a valid belief for the 2^nd Payment for Mr Tsoi would have broken the promise that Mr Chan had alleged Mr Tsoi had made in 2011. Why should Mr Chan act on Mr Tsoi’s empty promise for the second year in 2012?  I do not consider Mr Chan’s explanation credible.   

99.  Coincidentally, it was only in 2013 when the parties’ relationship had taken a bad turn that Mr Chan then refused to pay another sum of $64,600 demanded by Mr Tsoi.   Mr Chan’s denial of his liability for payment seems to have been more likely due to a breakdown of his relationship with Mr Tsoi rather than Mr Tsoi’s alleged non-compliance with the alleged condition of providing tax statements. I find this conduct clearly contradicts Mr Chan’s asserted mistake concerning the 1^st and 2^nd Payments.

100.  Last but not the least, I find Mr Chan had a tendency to shift or embellish his evidence when the situation suits him.

101.  This tendency was first evident in Mr Chan’s attempted backtracking from the Variation Agreement by the undertaking of the preparation of the Draft Agreement to insert clause 2 of the Draft Agreement to contradict the terms of the Variation Agreement.

102.  This shifting tendency seemed to continue up till the end of the trial. After Mr Chan had concluded his evidence in the re-examination, Mr Chan volunteered the information by alleging that he had recently learnt from Manulife that the company had not reported his loan repayments to the Inland Revenue as his earnings.

103.  In my judgment, this evidence is wholly inappropriate. Not only it had come rather late in the proceedings, it was never mentioned in any of his witness statements or disclosed before the trial, not to mention that it was wholly irrelevant as the alleged information is not concerning Mr Tsoi’s Loan repayments. I consider that such late evidence is prejudicial and should be disregarded

104.  In conclusion, I find that both the 1^st and 2^nd Payments were made in discharge of Mr Chan’s contractual obligations under the Variation Agreement.

F. CONCLUSION

105.  For the foregoing reasons, I am satisfied that:

(i) There was a legally binding Variation Agreement, which was not conditional on the signing of a written agreement.  Mr Chan is contractually bound to pay Mr Tsoi $64,600 each year for 10 years.

(ii) The 1st and 2nd Payments were not payments by mistake but payments in discharge of Mr Chan’s contractual obligations under the Variation Agreement.

106.  There should therefore be a judgment for Mr Tsoi on the claim with interest and the counterclaim be dismissed.

107.  As for interest on the judgment to be entered for the outstanding unpaid sum of $516,800, counsel are in agreement that pre-judgment interest should be awarded only for the years 2013, 2014 and 2015 payments in the total sum of HK$193,800 (HK$64,600 x 3).  As for post-judgment interest, Mr Tsui contends that no interest should be awarded for the balance of HK$323,000 (the future 5 instalments) on the ground that this amount is not yet due and payable.

108.  Mr Lo submits that Mr Tsoi is entitled to post-judgment interest for the entire judgment sum.

109.  Sections 49 and 50 of the District Court Ordinance (Cap.336) empower the court to award pre-judgment interest in a judgment for a debt or damages, and prescribe for the award of interest on a judgment debt from the time of entering of the judgment until payment.

110.  The power to award interest must be exercised with regard to the fundamental principle that interest should not be awarded as a punishment but as compensation for a plaintiff who has been deprived of the use of the money due to him.

111.  Here, upon the entry of judgment for the sum of $516,800, the entire sum is crystallized as a judgment debt. Accordingly, I consider that there are no good reasons why I should not grant post-judgment interest in the usual way. Thus, I would allow interest from the date of judgment.

G. ORDER

112.  I order as follows:

(1) There be judgment in the sum of $516,800 with interest on HK$193,800 at the judgment rate from the date of the writ on 14 March 2014 until judgment and interest on HK $516,800 from the date of judgment to the date of payment.

(2) The counterclaim be dismissed.

(3) There be a costs order nisi that the defendant do pay the plaintiff his costs of the claim and counterclaim with certificate for counsel, to be taxed if not agreed

113.  Lastly, I thank Mr Lo and Mr Tsui for their assistance.