TANG CHUNG WAH aka TANG CHUNG WAH, ALAN AND ANOTHER v. JONATHAN RUSSELL LEONG AND OTHERS

HCA 1691/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1691 OF 2011

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D E C I S I O N

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1.  The defendants apply by summons dated 30 April 2013 to strike out paragraphs 54 to 72 inclusive and reliefs 3 to 5 inclusive as well as reliefs 12 and 13 (collectively referred to as “the Subject Matters”) of the Plaintiffs’ Statement of Claim dated 18 November 2011 on the grounds that the same are frivolous and vexatious and an abuse of the court’s process relying on the doctrine of issue estoppel in support of their application in that the Subject Matters have been adjudicated upon and decided against the Plaintiffs by an Arbitration Tribunal in London and leave to enforce the Award in Hong Kong has already been granted by the Court.

Background

2.  The plaintiffs, defendants (together with other individuals) were at all material times the equity partners of a partnership carrying on a practice as a firm of certified public accountants in Hong Kong (“the Partnership”) under the name Grant Thornton which was later changed to JBPB & Co.

3.  Between 2007 and 2010, the Partnership also comprised some salaried partners, including six former partners of an accounting firm named Moores Rowland (“Ex-MR Partners”).

4.  Until December 2010, the Partnership had been the Hong Kong member firm of the Grant Thornton international network of accounting firms (“GT Network”). Grant Thornton International Ltd (“GTIL”) is the umbrella organization entity for the GT Network.

5.  All members of the GT Network were signatories of a Member Firm Agreement (“MFA”) which governed their inter - relationship and contained an arbitration clause.

6.  On the other hand, the relationship between the partners of the Partnership was governed by a partnership deed dated 1 October 2001 (“the Partnership Deed”).

7.  Clause 13(6) of the Partnership Deed provides that all determinations, resolutions and directions of the partners in a general meeting shall be made or passed by a simple majority of votes.

8.  The Partnership was expulsed from the GT Network in late October 2010. The equity partners of the Partnership formed the consensus view that the Partnership should be closed down for new business with effect from 1 January 2011.

9.  On 22 November 2010, partners of the Partnership entered into a deed of termination (“DOT”) where they dealt with, among others, the modalities for approaching the litigation with third parties, including GTIL, Jingdu Tianhua Certified Public Accountants Company Limited (“Jingdu”), Ex-MR Partners etc.

10.  For that purpose, clause 7.1 of DOT made provisions that any partners of the Partnership would have the right to carry on the litigations with such third parties in the name of the Partnership provided that such partners would be solely responsible for all costs and liabilities and they would provide an indemnity to the other partners on terms reasonably acceptable to the latter.

11.  On 18 April 2011, GTIL filed a request for arbitration to the London Court of International Arbitration (“the Tribunal”) against the Partnership claiming for damages and amounts due under the MFA.

12.  On 27 September 2011, the defendants as majority partners purportedly entered into a settlement deed (“the Settlement Deed”) in the name of the Partnership with, among others, GTIL, Jingdu and the Ex-MR Partners.

13.  On 6 October 2011, the plaintiffs commenced this action against the defendants.

14.  An ex-parte injunction was obtained by the plaintiffs to restrain the defendants from effectively executing the Settlement Deed.

15.  However, the application to continue the injunction at the inter-partes stage was withdrawn, as Deputy Judge Lok had indicated to the parties that the injunction was not necessary and it would be sufficient for the plaintiffs to give notice to the counter-parties to the Settlement Deed. The plaintiffs’ solicitors subsequently served such notices on the counter-parties on 26 and 27 October 2011.

16.  On 9 November 2011, GTIL and the majority partners requested the Tribunal to terminate the arbitration. The plaintiffs herein opposed the termination before the Tribunal.

17.  Eventually, in the award dated 26 March 2012 (“the Award”) the Tribunal ruled that the arbitration must be terminated, and ordered, among others, the plaintiffs herein (being the Minority Partners) to bear part of GTIL’s costs.

18.  On 5 April 2013, Au J re-granted leave to GTIL to enforce the Award in Hong Kong.

Defendants’ application for striking out

19.  In making this application for striking out, the defendants contend that the Subject Matters are premised on the plaintiffs’ contentions that:

(1) The defendants had no lawful right to and did not validly enter into the Settlement Deed, and

(2) Accordingly, the Settlement Deed did not bind the plaintiffs or the Partnership as a whole.

20.  It is the defendants’ submission that such contentions had been ruled against the plaintiffs by the Tribunal in the Award and that the defendants did have the lawful right to enter into the Settlement Deed on behalf of the Partnership which binds the plaintiffs.

21.  The minority partners’ application to set aside the Award was dismissed by the English court in November 2012.

22.  On 10 April 2012, GTIL applied ex parte to Au J. for leave to enforce the Award against the minority partners in Hong Kong under the Arbitration Ordinance.

23.  On 30 April 2012, Au J granted the ex parte order to give leave to GTIL to enforce the Award.

24.  At the inter partes hearing, Au J in his Judgment dated 5 April 2013 set aside the ex parte leave to enforce the Award (on the basis of material non-disclosure by GTIL) but re-granted leave to enforce the Award against the minority partners.

25.  The defendants therefore submit:

(1) That it is an abuse of the court process to re-litigate or re-open an issue that had been previously decided against a party by operation of issue estoppel and that a person should not be vexed twice for the same reason (see Parakou Shipping Pte Ltd v Jinhui Shipping and Transportation Ltd [2011] 2 HKLRD 1 at p 17);

(2) Issue estoppel arises even if the previous proceedings is an arbitration: Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630 at 643, especially when a prior arbitration award may be converted into a court judgment and enforced as such in Hong Kong: Parakou Shipping Pte Ltd (supra) at para 159.

(3) A claim is frivolous if it is not capable of reasoned argument, without foundation or where it cannot possibly succeed, whereas a claim is vexatious when it is oppressive and/or lacks bona fides.

26.  When it has already been ruled by the Tribunal that the defendants did have the lawful right to enter into the Settlement Deed on behalf of the Partnership and which binds the plaintiffs, it follows that:

(1) There is no logical basis for the plaintiffs to claim that in doing so the defendants acted male fide;

(2) There is no basis for the plaintiffs to claim an indemnity against the defendants for “all additional costs incurred or losses suffered by them in connection with the failure of their pursuit of the [Partnership’s] claims as result of the conclusion of the Settlement Deed” (para 63 Statement of Claim and relief 13), when this was merely the consequence of (a) the defendants exercising their lawful right to enter into the Settlement Deed which had the effect of binding the Partnership as a whole, and (b) the plaintiffs failing to take up the litigation in the name of the Partnership by their own failure to offer an indemnity on such terms that were reasonably acceptable to the defendants; and

(3) The conspiracy claim against the defendants (of using unlawful means with intent to injure or cause loss to the plaintiffs) which ends at the execution of the Settlement Deed thus also falls away (paras 68 to 71 Statement of Claim and relief 12).

27.  On the basis set out above, the defendants ask that the Subject Matters be struck out.

Plaintiffs’ opposition to the striking out application

28.  The plaintiffs oppose the application of the defendants to strike out the Subject Matters. 

29.  In a nutshell, the plaintiffs’ contention is that the Subject Matters, as disputed issues between the plaintiffs and the defendants, have not been decided or adjudicated upon by the Tribunal.

30.  What has been decided by the Tribunal was simply that the Settlement Deed binds the Partnership as a whole including the plaintiffs against GTIL because the majority rule applied, and clause 7.1 of the DOT was not engaged in fact.

31.  The plaintiffs contend that the Tribunal could not and has not adjudicated upon the internal dispute within the Partnership, namely, the dispute between the plaintiffs and the defendants, in particular whether the defendants were in breach of clause 7.1 of the DOT.

32.  Moreover, it is also the contention of the plaintiffs that the Tribunal could not and has not adjudicated upon the question of whether the plaintiffs are precluded from pursuing or continuing with the Partnership’s claims against counter-parties to the Settlement Deed other than GTIL.

33.  Given the above, the plaintiffs’ position is that issue estoppel has no application in so far as the Subject Matters are concerned and the defendants’ application for striking out must be dismissed.

Decision

34.  The application by the defendants relies on the doctrine of issue estoppel.

35.  It is trite law that for issue estoppel to apply, there needs to be (a) a final or conclusive judgment, decision and/or finding on merits by an earlier court of competent jurisdiction, (b) the parties need to be the same, and (c) the issue in the later action, in which the estoppel is raised as a bar, must be the same issue as was decided by the judgment in the earlier action.

36.  The decision of the Tribunal is crucial to this application in so far as the question of issue estoppel goes. It is therefore necessary to see the relevant parts of that decision of the Tribunal.

37.  Before going to the relevant parts of the decision of the Tribunal, it should also be noted that in so far as the arbitration was concerned, it was an arbitration brought by GTIL as claimant and that JBPB & Co (ie the Partnership) was named as the only respondent. JBPB & Co was originally represented by English Solicitors, namely, Salans LLP. However, on 24 August 2011, Salans LLP notified the Tribunal that it no longer represented JBPB & Co due to internal conflict which could not be resolved. Ultimately, two of the partners in the Partnership (being the present plaintiffs) were represented by a different firm of solicitors being Rosenblatt Solicitors. They were referred to by the Tribunal as the Minority Partners. Nine other partners in the Partnership (being the present defendants) and who were referred to as the Majority Partners by the Tribunal were represented by Messrs Hart Giles (the solicitors now acting for the defendants), in the arbitration.

38.  It should also be noted that in paragraph 3.1 of the Award, the Tribunal stated with no uncertainty what were the issues before the Tribunal and dealt with only in the Award, namely,:-

“1. Does the Tribunal have jurisdiction to determine this dispute?

2. If this Tribunal has jurisdiction, does the Settlement Deed preclude the Minority Partners from continuing their claims against GTIL?

3.   Deciding the claims for costs of the various parties.”

39.  From those issues which were before the Tribunal, it can readily be seen that the Tribunal did not concern itself with matters of internal dispute between the partners of the Partnership inter se.

40.  I turn now to deal with what was decided by the Tribunal and which can be seen from the following paragraphs taken from the Award:

“5.4 The claims of JBPB [ie the Partnership] against GTIL were assets of the partnership. A majority of JBPB’s partners in a meeting on 7 October 2011 voted to ratify the Settlement Deed on behalf of JBPB. They had the objective authority under the Partnership Deed and Hong Kong law to compromise or release JBPB’s claims.

…

5.7 Thus Hong Kong law, the Partnership Deed and the authorities all agree that GTIL and JBPB validly agreed to settle this dispute, the majority of the partners having had actual authority to do so on behalf of JBPB.

…

5.9 The DOT provided a means by which the Minority Partners [ie the plaintiffs] could proceed with the claims against GTIL on behalf of JBPB under certain stated conditions. It is pursuant to this right that the Minority Partners claim the ability to assert the counterclaim.

…

5.10 The record includes a draft Indemnity Agreement that the Minority Partners offered to Majority Partners on 17 August 2011. The Minority Partners rejected the indemnity, seeking security in support of the indemnity offered. Since Clause 7.1 of the DOT requires that the indemnity be reasonably acceptable to the Majority Partners, and since they did not, in fact, find the indemnity acceptable, Clause 7.1 of the DOT was never engaged.

5.11 The Majority Partners had the lawful right to settle the dispute and they did so.

5.12 If the Minority Partners have any claim as a result of an alleged breach of [Clause 7.1 of the DOT], their claim must be against the Majority Partners for damages from that breach. It has no effect upon the validity of the settlement between GTIL and JBPB.

5.13 Any such claim must be by the Minority Partners against the Majority Partners under the DOT.

5.14 English law governs the DOT. It has no arbitration clause. We have no right to adjudicate on any such claim and must leave it to the courts.

5.15 …it seems clear to the Tribunal that the Majority Partners were within their rights in refusing to accept a bare indemnification from the Minority Partners in a very expensive series of legal disputes which could involve liabilities for all of the partners of many millions of US dollars. Indeed, in our view the rejection of the indemnity was entirely understandable and wholly justified by the complete absence of any proffered security thereof.

5.16    In short, while the contentions of the Minority Partners in this respect were cleverly and skilfully argued, their cause is legally hopeless. This arbitration must be determined and the counterclaims of JBPB against GTIL wholly extinguished.”

41.  From the above paragraphs cited the Tribunal made the following rulings:

(a)     As a matter of Hong Kong statutory law and common law, the defendants as the majority partners had actual authority to settle the Partnership’s dispute with GTIL by executing the Settlement Deed;

(b)     Clause 7.1 of the DOT provided an exception to the above general rule. However, that provision was not engaged because the defendants did not in fact find the indemnity offered by the plaintiffs acceptable;

(c)      Therefore, while the plaintiffs may claim against the defendants for breach of Clause 7.1 of the DOT for wrongfully refusing to accept the indemnity offered, it does not affect the validity of the settlement between the Partnership and GTIL;

(d)     The Tribunal has no jurisdiction to determine the said possible claims by the plaintiffs against the defendants.

42.  It is therefore clear to me that the Tribunal has only decided that the default majority rule in partnership law, and not Clause 7.1 was applicable, such that the defendants had actual authority to settle the Partnership’s dispute with GTIL.

43.  The Tribunal has specifically refrained from deciding whether the defendants were in breach of their duties to the plaintiffs. Any claims which the plaintiffs (as Minority Partners) may have against the defendants (as Majority Partners) will have to be left to the courts to decide (para. 5.12, 5.13 and 5.14 of the Award refers).

44.  I turn now to deal individually with each of the paragraphs of the Subject Matters.

45.  Paragraph 54 pleads generally that the defendants had no authority to sign the Settlement Deed for the reasons stated in paragraphs 55 to 59 of the Statement of Claim. Therefore whether or not paragraph 54 can be maintained as a proper pleading or whether it should be struck out depends on the reasons given and pleaded in paragraphs 55 to 59.

46.  Paragraph 55 of the Statement of Claim pleads generally that as a matter of law, each partner in a partnership has the right to prosecute claims belonging to the partnership subject to the non-consenting partners asking for and being given an indemnity from such partner. The non-consenting partners cannot by a majority vote deprive such partner of his personal right to prosecute such claim. On that basis it is pleaded that the defendants have no authority to sign the Settlement Deed.

47.  Paragraph 56 of the Statement of Claim pleads, as an alternative to paragraph 55 thereof, the combined effect of clauses 7.1 and 7.2 of the DOT and that the option under clause 7.1 of the DOT to pursue or continue all or any of the potential actions of the Partnership is to be exercised after the 1^st 4^th and 7^th defendants have duly discharged their duties to make full disclosures under clause 7.2 of the DOT. The failure of the defendants to make such full disclosures and/or the condoning by the defendants of such failure to make full disclosures precludes the defendants from denying frustrating or thwarting the plaintiffs’ rights to exercise the option under clause 7.1 of the DOT by forcing the plaintiffs into settlement against the plaintiffs’ own wishes.

48.  Paragraph 57 of the Statement of Claim pleads, in the further alternative to paragraphs 55 and 56 thereof, the plaintiffs had offered an unlimited “indemnity” indemnifying the defendants of all costs and liabilities to the GTIL arbitration and by virtue of clause 7.1 of the DOT, the plaintiffs have the right to pursue and continue the GTIL arbitration against the wishes of the defendants and that the defendants have no authority to sign the Settlement Deed or to bind the plaintiffs to the Settlement Deed.

49.  In paragraphs 58 and 60 of the Statement of Claim and relief 5, the plaintiffs contend that Clause 7.1 of the DOT only requires the partners to give an enforceable assurance to protect the non-consenting partners against liabilities incurred, and does not require the putting up of actual security. The plaintiffs seek a declaratory relief to that effect.

50.  In paragraph 59 of the Statement of Claim, the plaintiffs contend that the defendants have acted male fide in breach of their duty of good faith under Clause 11 (1) of the Partnership Deed and Clause 6.2(a) of the DOT, and their fiduciary duties as pleaded in paragraphs 6 and 7 of the Statement of Claim, by seeking to use their majority votes to force all partners of the Partnership to settle disputes with the counter-parties in terms not most favourable to the Partnership, and thereby to deny, frustrate or otherwise thwart the plaintiffs’ rights to bring the Partnership’s claims against the counter-parties. Particulars of male fide were given and include:

(a) The defendants by their conduct, not only put the Partnership in a disadvantageous position to negotiate and conclude a settlement favourable to the Partnership, but also the terms of the Settlement Deed do not reflect the strength and value of the Partnership’s claims against GTIL and the Ex-MR Partners, a view shared by the defendants at the initial stage and supported by legal advice obtained by the Partnership;

(b) The failure of the defendants to act in good faith by insisting on full disclosure of the 1^st, 4^th and 7^th defendants in compliance with clause 7.2 of the DOT before deciding their stance on the potential actions with the counter-parties;

(c) The defendants’ intent was to benefit themselves by assisting the 1^st, 4^th and 7^th defendants to evade their duties of full disclosure under clause 7.2 of the DOT and consequentially to conceal the wrongdoings on their part or on the part of other defendants;

(d) Despite the fact that the 7^th defendant had always suggested that Jingdu owed the Partnership money for the business in the PRC snatched away by them from the Partnership for their benefit, the defendants agreed under clause 2 of the Settlement Deed that the Partnership should pay a sum of HK$1.5 million to Jingdu and under clause 1.5 thereof not to bring any claim against Jingdu. Such decision by the defendants could not be justified by any bona fide commercial reasons;

(e) The negotiation and conclusion of the Settlement Deed was also motivated by the personal desire of the defendants or some of them to rejoin the GT Network and was done at the expense of the best interest of the Partnership as a whole.

51.  Paragraph 61 of the Statement of Claim pleads factually letters issued by the plaintiffs’ solicitors giving notice to the defendants and the counter-parties to the Settlement Deed the case of the plaintiffs.

52.  Paragraph 62 of the Statement of Claim pleads that by virtue of section 7 of the Partnership Ordinance the Settlement Deed does not create any legal binding relationship between the plaintiffs on the one hand and the defendants and/or the counterparties to the Settlement Deed on the other hand.

53.  In paragraph 63 of the Statement of Claim and relief 13, the plaintiffs contend that if they cannot pursue their claims against the counter-parties because of the Settlement Deed, the plaintiffs claim against the defendants for an order of indemnity indemnifying the plaintiffs of all additional costs or losses suffered by them in connection with the failure of their pursuit of the Partnership’s claims.

54.  In paragraphs 64 to 67 of the Statement of Claim, the plaintiffs contend that the defendants have acted male fide in breach of their duty of good faith by seeking to implement the Settlement Deed.

55.  In paragraphs 68 to 71 of the Statement of Claim and relief 12 the plaintiffs contend that the defendants together with the counter-parties to the Settlement Deed with intent to injure the plaintiffs and/or to cause loss to the plaintiffs by unlawful means conspired and combined together to injure and/or defraud the plaintiffs by procuring or causing the Partnership to drop their claims against such counter-parties and by executing and implementing the Settlement Deed. The plaintiffs claim damages for such conspiracy.

56.  It can readily be seen that the Subject Matters as elaborated above relate to the internal disputes of the Partnership between the plaintiffs and the defendants.

57.  The Tribunal has never decided what the true construction of clause 7.1 of the DOT was. Nor has the Tribunal decided whether upon the true construction of clause 7.1 the plaintiffs were entitled to simply give an unlimited indemnity to the defendants without security. Ultimately therefore the Tribunal has not decided whether the defendants were in breach of clause 7.1 as is now alleged by the plaintiffs.

58.  The Tribunal has also not decided whether the defendants acted male fide vis-à-vis the plaintiffs in entering into the Settlement Deed to bind the entire Partnership including the plaintiffs.

59.  I also accept the submission of Mr. Wong, counsel for the plaintiffs, that these matters which were not decided by the Tribunal could not have been raised for decision by the Tribunal due to the fact that the issues before the Tribunal were of a very narrow compass relating only to the dispute between GTIL and JBPB Co. as a whole, and which could not have been widened to include the issues of internal dispute within the Partnership as between the Minority Partners and the Majority Partners. Therefore there can be no question of those issues of dispute now between the plaintiffs and the defendants being raised for decision before the Tribunal.

60.  With the possible exception of paragraph 55 of the Statement of Claim, it is quite clear that those matters of internal disputes between the plaintiffs and the defendants have never been adjudicated or ruled upon by the Tribunal.

61.  I say that paragraph 55 of the Statement of Claim is a “possible exception” because if paragraph 55 is looked at in isolation, it may appear that what has been pleaded therein has been decided upon and adjudicated by the Tribunal. However, I am of the view that paragraph 55 of the Statement of Claim cannot be looked at in isolation but must be read in its proper context together with the rest of the paragraphs making up the Subject Matters in this application. Viewed from that angle the matters pleaded in paragraph 55 of the Statement of Claim must be an integral part of the plaintiffs’ case against the defendants as pleaded in the rest of the paragraphs making up the Subject Matters.

62.  I also accept the plaintiffs’ submission that although it was ruled by the Tribunal that the defendants had authority to enter into and to execute the Settlement Deed, the fact that the defendants had authority to do so by reason of the majority rule is totally distinct and separate from the issue of whether they did so in breach of their duties of good faith and fiduciary duties to the plaintiffs. In other words, the fact that a person has the right to exercise certain powers does not necessarily mean that he has exercised them in good faith. They are separate and distinct issues.

63.  Therefore, although the Tribunal decided that the defendants had the authority to enter into the Settlement Deed which binds the Partnership including the plaintiffs, what the Tribunal did not decide was whether the defendants exercised their powers in good faith or not. A matter which the Tribunal specifically said had to be left to the court to be decided as being a dispute between the plaintiffs and the defendants.

64.  In the circumstances, there can be no question of issue estoppel arising in respect of the Subject Matters which are matters of internal dispute within the Partnership as between the plaintiffs and the defendants.

65.  Accordingly, the defendants’ application by Summons dated 30 April 2013 for striking out must be dismissed in its entirety. I so order.

Costs

66.  There is no good reason why costs should not follow the event and I make a cost order nisi that the defendants do pay the plaintiffs costs of this application and the hearing to be taxed (if not agreed) and paid forthwith.