LUK WING CHIN t/a SIGNTECH CO v. CHAN CHI SHING AND ANOTHER

CACV 437/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL 

CIVIL APPEAL NO. 437 OF 2006 

(ON APPEAL FROM HCA No. 9621 of 2000)

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J U D G M E N T

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Hon Yeung JA (giving the judgment of the Court):

Introduction

1.  Before Deputy High Court Judge To (the judge), the plaintiffs succeeded in their claims against the defendant and obtained judgment for $717,188.75 with interest and costs. The defendant’s counterclaim was dismissed.

2.  The defendant appealed against the judgment.

Background Facts

3.  The plaintiffs, the 2^nd plaintiff’s father (“Mr Lam”) and the defendant were partners of Signtech Company (“Signtech”), a company specialised in the supply and installation of signage works.

4.  Signtech had two sub-contracts to supply and install signage works for the Hong Kong Housing Authority (“HKHA”) in Tin Shui Wai, one with Penta-Ocean Construction Co Ltd (“Penta-Ocean”) in Area 102 for $779,000 and the other with China State Construction Engineering Corporation (“China State”) in Area 105 for $150,223.50. 

5.  Signtech carried out the two sub-contracts through the plaintiffs, particularly the 1^st plaintiff, and Signtech possessed, in paper form or electronic form, the main contract, colour shop drawings, sign schedules, location plans, layout plans and correspondence containing comments by Penta-Ocean, China State or HKHA on Signtech’s shop drawings.

6.  The relevant information in connection with works in Area 102 and Area 105, and other signage works undertaken by Signtech, in electronic form, was stored in the “Tiny” computer in Signtech’s office.

7.  In or about July 2000, the plaintiffs and Mr Lam orally agreed to buy out the defendant’s shares in Signtech and to pay off the debts of about $1.4 million owed to Madam Loke and Mr Luk, the defendant’s uncle and aunt.

8.  However, the plaintiffs and Mr Lam did not have sufficient funds to pay off the $1.4 million debts owed to Madam Loke and Mr Luk, and instead they asked to be retired from Signtech on terms to be agreed.

9.  The plaintiffs, Mr Lam, the defendant, Madam Loke and Mr Luk then executed a Deed of Compromise (“DC”), prepared by the defendant’s solicitors [Messrs Albert KK Luk and Co (“Albert Luk”)] and approved by the plaintiffs’ solicitors [Messrs Sit, Fung, Kwong and Shum (“SFKS”)] to take effect on 26 September 2000.

10.  Clause A10 of DC stipulated that all assets of Signtech, save those in the 7^th Schedule, belonged to the defendant. One of the assets in the 7^th Schedule was the “Tiny” computer.

11.  Under Clause A11, the defendant agreed to sub-contract the works in Area 102 and Area 105 to the plaintiffs on the same terms and conditions as those obtained by Signtech from Penta-Ocean and China State.

12.  Pursuant to Clause A11, the defendant duly executed two agreements in Chinese, sub-contracting the works in Area 102 and Area 105 (“the sub-contracts”) to the plaintiffs with effect from 22 September 2000.

13.  On 28 September 2000, the defendant changed the lock of Signtech’s office overnight. The 1^st plaintiff was only able to gain access to Signtech’s office with the help of Mr Ma, one of Signtech’s employees.

14.  The defendant later returned to Signtech’s office with three security guards and accused the 1^st plaintiff of unlawfully breaking into his office.

15.  The defendant also refused to allow the plaintiffs access to the “Tiny” computer, claiming that all data contained therein belonged to Signtech.

16.  The plaintiffs then demanded from the defendant all relevant documents to enable them to perform the sub-contract works in Area 102 and Area 105 as well as the delivery of all properties listed in the 7^th Schedule under clause A10 of DC.

17.  On 30 September 2000, the plaintiffs, on being invited to collect the properties listed in the 7^th Schedule, refused to take delivery of the “Tiny” computer as the data contained therein had been removed.

18.  The plaintiffs then demanded, through SFKS, all relevant documents and data to enable them to perform the sub-contracts. The defendant only supplied some black and white drawings, but refused to provide the plaintiffs with data from the “Tiny” computer, the colour drawings and the comments by Penta-Ocean or China State in connection with the works under the sub-contracts in Areas 102 and 105.

19.  Consequently, the plaintiffs were unable to continue with the sub-contracts, which the defendant subsequently took over and completed.

The Plaintiffs’ Case

20.  It was the plaintiffs’ case that the sub-contracts carried with them implied terms that the defendant would not hinder or prevent them from performing the works under the sub-contracts in a regular and orderly manner; that the defendant would deliver to them all relevant information and documents and co-operate with them so as to facilitate the execution of the works under the sub-contracts.

21.  The plaintiffs alleged that the defendant was in breach of those implied terms, and by removing the data from the “Tiny” computer, the defendant had rendered it impossible for the plaintiffs to complete the works under the sub-contracts within the stipulated time.

22.  The plaintiff therefore claimed against the defendant damages for breach of the sub-contracts; an indemnity in respect of all claims by Penta-Ocean, China State or HKHA in respect of the sub-contracts, and an account of all sums received and receivable by Signtech in respect of the sub-contracts.

The Defendant’s Case

23.  The defendant contended that the data contained in the "Tiny" computer were intellectual properties belonging to Signtech and as the plaintiffs had retired from Signtech, they no longer had the right of access to them.

24.  The defendant further contended that the 1^st plaintiff, having negotiated with Penta-Ocean and China State on the sub-contracts, should be familiar with their terms and conditions and in any event, he had provided them with adequate drawings and information to enable them to complete the sub-contracts. As the plaintiffs had failed to complete the works under the sub-contracts, they were in breach and the defendant counterclaimed for damages.

The Judge’s Findings

25.  The judge, having referred to The Mooorcock (1889) 14 PD 64, Reigate v Union Manufacturing Co [1918] 1 KB 592, Shirlaw v Southern Foundries (1926) [1939] 2 KB 206, Trollope & Colls v North West Metropolitan Regional Hospital Board [1973] 2 All ER 260 and Luxor (Eastbourne) v Cooper [1941] AC 108, concluded that the court should imply such terms as would implement the presumed intention of the parties to give business efficacy to the sub-contracts.

26.  The judge emphasized the following factual matters:

“…the plaintiffs and the defendant were formerly business partners. The 1^st plaintiff secured the [works] for Signtech and worked on them. The parties agreed to split on certain terms including that the plaintiffs be given the benefit of the [works] under the name of Signtech and paid $500,000 for their retirement from Signtech. The defendant would act as a go-between for the plaintiffs with Penta-Ocean and China State without reward in relation to the executions of the [works]. Part of plaintiff’s work was stored in the form of data in the “Tiny” computer prior to the split. The defendant agreed that the “Tiny” computer would be given to the plaintiffs. The data stored in the “Tiny” computer included shop drawings which the plaintiffs prepared and, in particular, feed backs in the form of comments by Penta-Ocean, China State and HKHA. The data were effectively work-in-progress, which the plaintiffs might conveniently perfect and turn into finished products, through the process of approval by Penta-Ocean and China State and then production and installation….It is convenient, if they had access to the data. They could have quickly perfected their designs from previous drafts. That is why I consider the data also as work-in-progress. Access to the Data is reasonably necessary to enable them to complete the works in accordance with the time schedule. Such access would save delay caused by communicating with Penta-Ocean, China State and HKHA. It saves costs. It makes good business sense. On the contrary, it makes no sense, business or otherwise, that the plaintiffs should set their progress back in time by seeking comments from Penta-Ocean, China State and HKHA and to work on out-dated drawings when up-dated ones were readily available. Furthermore, in the absence of contractual relationship with the plaintiffs, there was a real likelihood that Penta-Ocean, China State and HKHA would not see fit to respond to the plaintiffs’ enquiry or requests for comments. The defendant may have his personal motive for refusing the plaintiffs’ access to the data. But the test to be applied is not based on the parties’ subjective intention, but what the parties as businessmen must have presumed or intended to give business efficacy to the transaction. These businessmen must be possessed of robust business sense intending to see the transaction through to fruitful completion….”

27.  The judge concluded that the plaintiffs and the defendant must have intended that the following terms form part of the sub-contracts to give them business efficacy, namely:

(a)  Signtech would not hinder or prevent the plaintiffs from performing the sub-contracts and from carrying out the sub-contracted works in a regular and orderly manner;

(b) Signtech would timely deliver to the plaintiffs all relevant

information, instructions and drawings including the relevant documents and comments by Penta-Ocean, China State and HKHA; and

(c)  Signtech would co-operate with the plaintiffs so as to

facilitate the execution of the sub-contracted works.

28.  The judge pointed out that despite the plaintiffs’ written demand made on 28 September 2000, the defendant only provided part of the drawings in connection with the sub-contract works in Areas 102 and 105. Those drawings were supplied late, namely only on 7 & 10 October 2000. They were incomplete, in black and white instead of colour and not up-to-date.

29.  The judge further pointed out that the defendant had removed the data from the “Tiny” computer and withheld altogether the comments from Penta-Ocean, China State and HKHA, which were very important information for the plaintiffs to finalise their design.

30.  The judge emphasized that the defendant, on 13 October 2000, informed the plaintiffs that Penta-Ocean had demanded the finalised design drawings on the same date and completion of the installation by 18 October 2000, failing which Penta-Ocean would charge a daily penalty of $250,000, yet the defendant still refused to provide the plaintiffs with the data in the “Tiny” computer and only provided them with blurred and distorted drawings, rendering it impossible for the plaintiffs to finalise the design and to complete the works under the two sub-contracts on or before 18 October 2000.

31.  The judge further emphasized that the defendant then, on 14 October 2000, alleged that the plaintiffs were in breach of Area 102 sub-contract and intimated that it would be taken over, which he did on 16 October 2000. The judge pointed out that the defendant had already worked on the Area 102 sub-contract long before 14 October 2000.

32.  The judge concluded that the defendant was creating an excuse in order to regain the sub-contracts, having had second thoughts about the DC.

33.  The judge concluded that the defendant was in repudiation of the two sub-contracts by failing to comply with the aforesaid implied terms and the plaintiffs were entitled to accept the repudiation and seek damages from the defendant.

34.  The judge assessed that works completed by the plaintiff, but not paid for to be $470,881.35 and that the value of the balance of the works under the sub-contracts to be $821,024.65 (i.e. the contract sum of $1,291,906 - $470,881.35). Based on a profit margin of 30%, the loss of profit for the balance of the work was $246,307.40 (i.e. $821,024.65 x 30%), making a total loss of $717,188.75 (i.e. $470,881.35 + $246,307.40).

35.  The judge therefore awarded damages to the plaintiffs under the Area 102 sub-contract in the sum of $717,188.75, but concluded that there would be no profit for the Area 105 sub-contract.

Grounds of Appeal

36.  The defendant, in his Chinese homemade grounds, set out a number of objections to the plaintiffs’ claim.

37.  The defendant said that when the plaintiffs withdrew from Signtech, there was no formal transfer of documentations and there was therefore no basis for suggesting that he had failed and/or refused to provide the plaintiffs with the relevant documents. The defendant nevertheless emphasized that he had provided the plaintiffs with all the relevant documents.

38.  The defendant also emphasized that it was not necessary to obtain the “Tiny” computer to gain access to the information contained therein. The defendant pointed out that the plaintiffs were 100% in charge of Signtech and they could have taken away all the information contained in the computers of Signtech if they wanted. The defendant suggested that the plaintiffs could have obtained the necessary documents from Penta-Ocean quite easily.

39.  The defendant said that there was not a shred of evidence showing that he had in any way behaved in an improper manner. He claimed that the plaintiffs had misbehaved by setting up another company with the same name as Signtech in order to channel business and assets from Signtech.

40.  The defendant alleged that the plaintiff had defrauded an old couple (referring to Madam Loke and Mr Luk) of a large sum of money and refused to repay them even though they were old, childless and desolated.

41.  The defendant further alleged that the plaintiffs had defrauded Madam Loke, Mr Luk and his father of $1.4 million and instead of offering a helping hand during their most difficult time, tried to impose on him an unfair agreement.

42.  The defendant suggested that the plaintiffs were in charge of the Areas 102 and 105 sub-contract work and that they had unreasonably withdrawn money from Signtech’s account. The defendant said he had no money to pay any damages to the plaintiffs. He said the profit margin for Signtech in the Area 102 and 105 sub-contracts was “zero” and the judge was wrong to assess it at 30%.

43.  The defendant said he must appeal to seek justice for Mr Luk.

Discussion

44.  Whatever was the parties’ relationship and however such relationship deteriorated, the existence of the DC could not be disputed.

45.  Under the DC, the defendant agreed to sub-contract the works in Areas 102 and 105 to the plaintiffs and the two sub-contracts in Chinese were executed to take effect from 22 September 2000.

46.  The defendants also agreed that the “Tiny” computer belonged to the plaintiffs.

47.  The defendant must have realized that the plaintiffs required all the relevant documentations and the data contained in the “Tiny” computer in order to execute the two sub-contracts. The defendant’s suggestion that the plaintiffs could have completed the sub-contracts without the relevant documentations and the data from the “Tiny” computer was unreasonable and quite properly rejected by the judge.

48.  However, due to personal grudges, the defendant removed the data from the “Tiny” computer and unreasonably withheld the relevant documentations from the plaintiffs, rendering it impossible for them to properly carry out the sub-contracts.

49.  The judge was clearly right to read into the two sub-contracts the implied terms he had found to give the two sub-contracts their necessary business efficacy.

50.  The judge was entitled to find that the defendant was in breach of those terms and had therefore repudiated the sub-contracts.

51.  The defendant’s argument that he had provided the plaintiffs with all the relevant documents was not borne out by the evidence. The defendant, having removed the data from the “Tiny” computer and then claimed that they had no intellectual right to those data, had demonstrated that he had not, for whatever reason that he felt justified, adopted a reasonable approach in his dealings with the plaintiffs.

52.  The judge’s findings, including the findings on the issue of damages, were essentially findings of facts.

53.  The judge went through, in commendable detail, the background and the evidence of the case as well as the relevant legal matters to resolve the issue of whether the defendant was liable for breach of the sub-contracts.

54.  The judges’ conclusion that the defendant was so liable was, in our view, unassailable. It was certainly not a conclusion that could be disturbed by the Court of Appeal in accordance with the principle established in Tang Kwok Ming v Daxprofit Scaffolding Ltd (unreported CACV 5/1998)

55.  The defendant’s complaints against the plaintiffs’ conduct, in particular how they had improperly treated Madam Loke and Mr Luk, were not matters relevant to the disputes between the plaintiffs and the defendant on the sub-contracts. The allegation that the plaintiffs had set up another company with the same name as Signtech in order to channel business and assets from Signtech was withdrawn before the judge. They are not matters that could be pursued in this appeal.

56.  The judge’s award of damages, based on the evidence that he had heard, on its face was not wrong and certainly not so outside the permissible range of awards except that the judge appeared to have overlooked, in calculating the loss of profit, the sum of $480,000, being the amount of works done and paid for.

57.  The plaintiffs conceded that the award of damages by the judge was excessive. In their written submissions, the plaintiffs accepted that the total contract sum was $1,291,906 and that $480,000, being the amount of works done and paid for should be deducted in the calculation of the loss of profit.

58.  The plaintiffs accepted that the value of unpaid works was $596,560 and that the loss of profits, based on 30% of the balance of $215,346 should only be $64,604, making a total loss of $661,164 (i.e. $596,560 + $64,604).

59.  In fact the judge found that the value of unpaid works was only $470,881.35, bearing in mind the usual disallowance in construction contracts. The plaintiffs did not object to the judge’s finding.

60.  Taking into consideration the $480,000, being the amount of works done and paid for, the value of the balance of the works should only be  $341,024.65 (i.e. $1,291,906 - $480,000 - $470,881.35) and basing on a 30% profit margin, the loss of profit should be $102,307.40 (i.e. $341,024.65 x 30%).

61.  The total damages suffered by the plaintiffs under the Area 102 sub-contract should therefore be $573,188.75 (i.e. $470,881.35 + $102,307.40)

Conclusion

62.  We find no merits in the defendant’s appeal and we dismiss it except that the total damages awarded to the plaintiffs are reduced to $573,188.75 with interest thereon from the date of the issue of the writ.

63.  We make no order as to costs.