SINODENTAL INVESTMENTS LTD AND OTHERS v. SIN CHUNG YIN RONALD AND OTHERS

HCA 2176/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2176 OF 2012

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D E C I S I O N

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The applications

1. There are two applications for this hearing:

a.  an application by the 5^th defendant and the 6^th defendant by summons dated 27 March 2014 to strike out certain parts of the Statement of Claim (“SOC”), relying upon O.18, r.19(a), (b) & (d) of RHC and the inherent jurisdiction of the Court;

b.  an application by the 1^st, 2^nd and 3^rd plaintiffs (collectively “plaintiffs”) by summons dated 12 June 2014 to amend the Statement of Claim (“plaintiffs’ amendment summons”).

2. The applications are contested.

3. Mr.  R. Zimmern, counsel, acts for the plaintiffs and Mr. C.Y. Li, senior counsel acts for the 5^th and the 6^th defendants.  Mr. F. Fong acts for the 4^th and 7^th to 18^th defendants, who support the 5^th and 6^th defendants’ application, opposing the application for amendment.  Ms. Young, solicitor acts for 1^st to 3^rd defendants, who have made no submissions on the applications.

4. Since this is the application of the 5^th and the 6^th defendants’, they will be referred to collectively as “the defendants” unless it is necessary to specifically identify them as the 5^th and the 6^th defendants respectively.

The factual background

5. The 1^st plaintiff is the majority shareholder of the 2^nd plaintiff, which is the holding company of a group of subsidiaries providing a wide range of dental services in Hong Kong and Macau.  The 3^rd plaintiff is the operating subsidiary under the control of the 2^nd plaintiff.  The 1^st, 2^nd and 3^rd defendants were the shareholders and directors of the 2^nd and the 3^rd plaintiffs.[1]  The 1^st, 4^th, 5^th and 6^th defendants were the employees of the 3^rd plaintiff.  The 7^th to 18^th defendants are the companies allegedly set up in competition with the plaintiffs’ business (“the XD Clinics”) and the 1^st to 6^th defendants were allegedly in breach of the shareholders’ agreements, the employment agreements and fiduciary duties by their involvement in the XD Clinics.[2]  The 19^th defendant was a consultant under an agreement with the 3^rd plaintiff.[3]

6. The plaintiffs claim against the 1^st to 6^th defendants for various breaches of their shareholders’ agreements, employment agreements and/or fiduciary duties as employees and/or directors for their involvement of the formation and operation of the XD Clinics.

7. Further or in the alternative, the plaintiffs plead that the 1^st to the 18^th defendants conspired with one another in carrying out unlawful competition against the plaintiffs’ business by unlawful means.[4]

The application for amendment of Statement of Claim

8. The defendants submit that the plaintiffs’ proposed amendments to the Statement of Claim would not affect the defendants’ application to strike out parts of the Statement of Claim.  They, however, contest that leave should not be granted to the plaintiffs to amend the Statement of Claim.[5]

9. Those grounds as stated in Mr. Li SC’s written submissions from paragraphs 5.12 (a) to (c) have been taken into consideration.  I consider that the defendants would have no ground to oppose the plaintiffs’ application because when the Court considers the defendants’ application for striking out, it has to consider whether the impugned parts of the Statement of Claim can be saved by way of amendments to the Statement of Claim.  See the Court of Appeal’s decision in Ha Francesca case below.  The striking out order would only be granted if the Court found that the proposed amendments would not save the parts of the Statement of Claim to be struck out.

10. For the other defendants, Mr. Fong has submitted that his clients support the 5^th and the 6^th defendants in their strike-out application and that they oppose the plaintiffs’ application for amendment for the reason that they had requested for further and better particulars from the plaintiff and that they want to reserve their positions to strike out the plaintiffs’ claim subsequently. They further say that the proposed amendments are useless for the plaintiffs’ case.  I consider that those are insufficient reasons to oppose the plaintiffs’ application for amendment.  Whether the amendments are useful for the plaintiffs’ case is for the plaintiffs’ legal advisors.

11. For the reasons above, I grant leave to the plaintiffs to amend the Statement of Claim as per the proposed draft.

12. I shall now consider the defendants’ application for striking out.

The application for striking out

13. The defendants apply to strike out paragraphs 16, 17, 18 and 21of the Statement of Claim as far as the defendants are concerned.

14. Paragraph 16 of the Statement of Claim contains allegation that the defendants participated in the establishment, management, operation and/or control of the XD Clinics.[6]

15. Paragraph 17 of the Statement of Claim alleges that the defendants had conspired with the rest of the defendants to carry out unlawful competition against the business interest of the plaintiffs’ by unlawful means.[7]

16. Paragraph 18 of the Statement of Claim contains allegation of the defendants doing acts with the predominant purpose of injuring the business interest of the plaintiffs’.

17. Paragraph 21 contains allegation of the defendants’ unconscionable breach of their employment agreements.

The reasons for the parts of the Statement of Claim to be struck out

18. The defendants submit that the above paragraphs in the Statement of Claim should be struck out on the followings grounds:

a.  in respect of paragraph 16, there is a singular absence of any material facts being pleaded in support of the allegation that the defendants “participated in the establishment, management, operation and/or control of XD Group of companies and clinics”[8];

b.  in respect of paragraphs 17 and 18:

  i.  There is no plea of what agreement had been entered into by the defendants for the alleged conspiracy.

  ii.  Whereas in paragraph 17 of the Statement of Claim, the plaintiffs’ plea unlawful means signifying just an intention to injure on the part of the 1^st defendant to the 18^th defendant, in paragraph18, the plea changed to become one of a predominant intention to injure signifying a lawful means conspiracy.  The pleas are inconsistent.[9]

c.  in respect of paragraph 21, the complaint is that there is no such cause of action as “unconscionable” breach of employment agreements as separate and distinct from just “breach” of employment agreements.[10]

The relevant legal principles

19. It will be, at this stage, convenient to consider the relevant legal principles for the application:

a.  In Pak Win Investment Ltd (in compulsory liquidation) v Chung Yuet Sheung, Lorrain and Others (unreported, HCA419 of 2011, DHCJ Au-Yeung (as she then was) 9 February 2012 at §§12 and 13) set out the relevant legal principles, which are undisputed:

“It is only in plain and obvious cases that pleadings should be struck out. The burden to establish this is on the applicant... The claim must be obviously unsustainable, pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed. Even if a case only has a slim chance of success, this is not sufficient to strike it out: Karex (HK) Ltd v Fortune Talent Development Ltd [1999] 4 HKC 203, at 210F. Nor should sparsity of detail lead to a similar result. The sufficiency of the facts pleaded should be assessed in the overall context of the pleadings and the case: The Bank of East Asia Ltd v Labour Buildings Ltd & ors [2007] HKCFI 1129.”

See also Jackson Xu Zhao Ze & Another v Tsai Tim Yuen & Another (unreported, HCA902/2011, 22 May 2013 DHCJ Tam SC at §§8-16);

b.  The above legal propositions are consistent with the decisions of the Court of Appeal in Ha Francesca v Tsai Kut Kan (No.1) [1982] 1 HKC 382 at 392:

“The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out.”

c.  Fok J. (as he then was) held in The New China Hong Kong Group Ltd (in Creditors’ Voluntary Liquidation) v The New China Hong Kong Development Ltd. (in Creditors’ Voluntary Liquidation) (unreported, HCA 519/2010, 11 February 2011)that although that case (referring to the Ha Francesca case) was decided before the implementation of the Civil Justice Reform, the passage cited remains fully applicable to an application to strike out (after the CJR).  The learned judge also held that particulars of fraud and dishonesty must be pleaded and it is not permissible to infer dishonesty on pleaded facts not consistent with dishonesty [65]; that it is an abuse of the process to state a case without solid foundation hoping that something will turn up in the course of the proceedings, for example at the stage of discovery or on cross-examination, or to stop time from running [70];

d.  The proper pleadings for conspiracy as illustrated in Pido v Compass Technologies Co Ltd [2012] 2 HKLRD 537, at §17 the Court of Appeal held:

“As a matter of pleading, a case based on conspiracy, must contain the following elements (emphasis added):

(1) The agreement between two or more persons. The means of carrying out the agreement, whether lawful or unlawful, must be set out.

(2) The intention to injure the Plaintiff, whether predominant (in the case of a lawful means conspiracy) or merely an intention to injure (in the case of an unlawful means conspiracy).

(3) The acts that were carried out pursuant to the agreement and the stated intention.

(4) The damage caused to the Plaintiff.

      See : Bullen & Leake & Jacob’s Precedents of Pleadings (16th edition) Vol.2 at paragraph 51-02.”

e.  As to the “element of agreement between two or more persons”, it was illustrated in Pak Win Investment Ltd (in compulsory liquidation)’s case at §15 of the Decision:

‘According to Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271:

“… It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy or combination. (at page 312g)

… it is not necessary to show that there is anything in the nature of an express agreement, whether formal or informal. It is sufficient if two or more persons combine with a common intention, or, in other words, that they deliberately combine, albeit tacitly, to achieve a common end. (at page 312h)

‘… the origins of all conspiracies are concealed and it is usually quite impossible to establish when or where the initial agreement was made, or when or where other concentrators were recruited. The very existence of the agreement can only be inferred from overt acts. Participation in a conspiracy is infinitely variable: it can be active or passive ... Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that he knew what was going on and the intention to participate in the furtherance of the criminal purpose is also established by his failure to stop the unlawful activity.’ (at page 312j-313b) (emphasis added)

Thus it is not necessary for the conspirators to join the conspiracy at the same time, but ... the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of. (at page 313c)

…

In most cases it will be necessary to scrutinise the acts relied upon in order to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy or combination. It will be the rare case in which there will be evidence of the agreement itself. (at page 313d) (emphasis added)

… in order to establish an unlawful means conspiracy, it is necessary to establish an intention to injure the claimant but not a predominant intention or purpose to do so. (at page 314j)

… in many contexts it will be necessary in order to prove intention to ask the court to infer the relevant intention from the primary facts ... in the case of most conspiracies to injure by tortious means it will be clear from the acts of the conspirtors that they must have intended to injure the claimant. In the case of a conspiracy to defraud by wholesale misappropriation it would be absurd to argue that the conspirators did not intend just that.” (at page 315f-g)’

See also UBS Wealth Management v Vestra Wealth LLP [2008] IRLR 965 at §§21–38. Although this case was an application for a springboard relief of interim injunction, the rationale relating to circumstances, which could lead to conspiracy though there was lack of direct evidence of agreement equally applies to this case.

20. Bearing in mind the above legal principles, I shall proceed to consider the defendants’ application for striking out.

21. First of all, I shall set out the relevant allegations of the plaintiffs as set out in counsel’s written submissions below:

“(1) D5 and D6 signed their respective Employment Agreements which provide impliedly that they owed fiduciary duties to P3 and expressly not to compete with P3 within a specified area of the Tsuen Wan district for 2 years post-termination in the dental business (paras. 4, 5 and 8 of the SOC [68–70]).

(2) D5 and D6 both resigned on 17.07.2012 and ceased employment on 16.10.2012.

(3) Very shortly after the resignation of D5 and D6, the XD Tsuen Wan Clinic was established on 27.07.2012 (SOC para. 9(3)(vi) [72].

(4) At unknown dates, D2, D5 and D6, together with the ex-employees of P3 mentioned in sub-paragraph (5) below, presided at and provided dental services at the XD Tsuen Wan Clinic (SOC para. 9(8) [75]). This XD clinic uses strikingly similar price leaflets to that of P3 and is clearly designed to compete with P3 (SOC para. 16(4) [78]).

(5) Luzy Chin, Sharon Chong, Joyce Yeung, Cath Chan, Ng Sui Ting and Winnie Lau all resigned from P3’s employment from March to September 2012 and all subsequently took up work at the XD Tsuen Wan Clinic albeit at unknown dates (SOC paras. 16(20), (22) and (23) [81]).

(6) In total 23 employees, consultants and administrative staff moved en masse to join the XD Clinics. As to the proximity of the exodus of employees to the XD Clinics:

a. 13 former employees and consultants of P3 joined XD Clinics operated by D12-D17 as presiding dentists or hygienists [(SOC para. 9(8) [74]).

b. Over 10 former administrative staff of P3 had also joined the XD Clinics (SOC para. 9(9)[75]).

(7) By working at the XD Tsuen Wan Clinic D5 and D6 are in breach of the restrictive covenant in their Employment Agreements (SOC paras. 16(11) and (12) [79]).”[11]

22. The defendants admit that they were former employees of the 3^rd plaintiff and they are now employees of the 17^th defendant which they joined after having resigned from the 3^rd plaintiff.  They deny that they were involved in the establishment, management, operation and/or control of XD Clinics.  They also deny that XD Tsuen Wan clinic was in direct competition with H&C Group and they were in breach of the said clause 12 which was wider than necessary for protecting the interest of the 3^rd plaintiff.  They further deny the allegation of conspiracy with the purpose of injuring the business interest of the plaintiffs and they deny the alleged unconscionable breach of employment agreements.[12]

Paragraph 16 of the Statement of Claim

23. As to paragraph 16 of the Statement of Claim, the defendants argue that there is no pleaded facts in support of the plaintiffs’ claim “participated in the establishment, management, operation and/or control of XD Group of companies and clinics”.  The defendants say that it is speculative to draw the inference on the alleged proximity of time when the defendants and other ex-employees of the 3^rd plaintiff tendered their resignations from 3^rd plaintiff and their respective engagements in XD group of companies and clinics to mean that the defendants assisted or encouraged the 1^st to 4^th defendants to entice the ex-employees to leave the 3^rd plaintiff’s employment. The defendants insist that there must be material facts in support of the allegations, the proposed amendments are simply not sufficient.

24. The legal principles cited in Pak Win, supra have amply illustrated that it is possible to draw inference from the factual circumstances to infer agreement between the conspirators, whose agreement is normally tacit or unexpressed at all.  This trite principle is also demonstrated in Ming Shiu Chung, also known as Hubert Ming & Others v Ming Shiu Sum also known as Lawrence Ming Shui Sum & Others (2006)9 HKCFAR 334 (Ribeiro PJ, 23 May 2006) where the Court of Final Appeal held at §45 ‘As Sir Anthony Mason NPJ pointed out in HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336, at §72, inferences of fraud or serious misconduct are “......not to be reached by conjecture nor ...... on a mere balance of probabilities.”  They are “to be plainly established as a matter of inference from proved facts”.’  This is contrasted with the situation where conspiracy or fraud was not pleaded at all as at §54, Ribeiro PJ said “The fraud theory was simply not open to the Judge.  It is nowhere pleaded.”  It was on this basis that this Court refused discovery in Joyce T. Ongsip t/a LT Enterprises Co. v Pimatronics Ltd. (unreported, HCA611/2010, 7 June 2012) because conspiracy was deliberately not pleaded in the pleadings.  For the same reason, I allowed discovery of the documents in this action on 20 June 2014 by the plaintiffs on their application for discovery of documents from the 4^th and 7^th to 18^th defendants. In this case, conspiracy has been expressly pleaded in the Statement of Claim.  Of course, it does not mean that whenever conspiracy is pleaded in the pleadings, the Court must allow discovery of documents even if it is a fishing exercise.  The Court should not exercise its discretion mechanically.  It has to consider the other relevant facts and circumstances as pleaded in the pleadings to be satisfied that the applicants have set up a prima facie case in support of conspiracy against the defendants.  In the exercise of its discretion, the Court must follow the judicial guidelines as Ma J (as he then was) said in Wing Mou Construction Co Ltd (in Liquidation) v Cosmic Insurance Corporation Ltd & Another (unreported, HCCT40/2001, 6 June 2002) at §15(6) : “…as with any exercise of discretion by the court, orders should only be made where necessary, just and convenient.”  The Court must look at the context of the case itself.

25. It is true that the defendants had requested the plaintiffs to supply further and better particulars in respect of paragraph 16 of the Statement of Claim and the defendants complain that the plaintiffs simply repeated paragraph 16 as the particulars, saying they would plead further particulars on the involvement of the 1^st to 4^th defendants in the establishment, operation and management of the XD Group of companies and clinics with the assistance/or encouragement of the defendants after discovery or interrogatories.  The defendants complain that the pleadings for paragraph 16 are half-pleaded claim, referring to the comments in Jackson Xu.[13]

26. The defendants are not, in this application, applying for an unless order for the plaintiffs to supply further and better particulars for paragraph 16 of the Statement of Claim.  They consider that it is unnecessary to do so because the plaintiffs’ pleaded paragraph 16 can be struck out as it now stands.

27. It is obvious that what have been pleaded by the plaintiffs in the pleadings are the best particulars that they are able to give in support of their case against the defendants.  The question therefore turns on squarely whether without further and better particulars, paragraph 16 should be struck out.

28. Applying the legal principles as set in Pak Win, it is apparent that, taking into consideration of the pleaded facts of the plaintiffs and the defendants’ admission in paragraphs 21 & 22 supra, it cannot be said that the plaintiffs’ case is so obviously bad that it is impossible for them to succeed at trial.  Clearly, the plaintiffs are now relying on the circumstantial evidence to say that the defendants conspired with other defendants to injure their business interest.  It is a matter of inference to be drawn at trial by the judge; the evidence being subject to cross-examination.  The overt acts as complained by the defendants can be seen from the resignation of the defendants and joining of the competing business within a short time and the leaving of other employees of the plaintiffs’ within a short period of time, then joining the XD Clinics, knowing of course, the competing business would be injurious to the plaintiffs’ business. Whether inferences can be drawn from such overt acts in support of the plaintiffs’ claims against the defendants will be for the trial judge.  As such, as held by the Court of Appeal in Ha Francesca v Tsai Kut Kan (No.1), this paragraph should not be struck out.  The Court should not embark upon an examination of the evidence at the interlocutory stage for this application.  Hong Kong Niroku Ltd v Kyokuto Securities (Asia) Ltd (unreported, HCA 4122/2000, Sakhrani J, 18 March 2002) at §§24-25.

Paragraphs 17& 18 of the Statement of Claim

29. The complaints are (i) there was no plea of conspiracy agreement due to lack of pleaded facts in support of agreement of conspiracy and (ii) pleas in paragraph 17 and in paragraph 18 are inconsistent.

30. The analysis for paragraph 16 above equally applies to paragraphs 17 and 18.  The plaintiffs have no direct evidence of the defendants’ agreement of conspiracy.  They simply rely upon the circumstantial evidence, asking the court to draw the inference of conspiracy against the defendants, which is a matter for the trial.  On this basis, these paragraphs should not be struck out.

31. As to the inconsistent pleas of paragraph 17 and paragraph 18, the plaintiffs have proposed amendment to paragraph 18, pleading the further and/or the alternative plea of lawful means.  Mr. Li SC has submitted that the defendants might not be in breach of their fiduciary duties the moment they had left the employment of the plaintiffs’.  The amendment has rectified the situation complained of.  In my view, these paragraphs should not be struck out.

Paragraph 21 of the Statement of Claim

32. The complaint is that there is no such cause of action as “unconscionable” breach of employment agreements as separate and distinct from just “breach” of employment agreements.[14]

33. The plaintiffs answer the complaint saying that the plea in paragraph 21 as against the defendants for equitable relief is based not only on the breach of their employment agreements but also the facts and matters pleaded in paragraphs 9 to 18 of the Statement of Claim.  It is pleaded in paragraph 17 that by virtue of the alleged conspiracy the defendants were in breach of their fiduciary duties owed to the 3^rd plaintiff (see also paragraph 8 and relief (3) by the 3^rd plaintiff against the defendants [88]).  As such, the plea has to be read in conjunction with these other pleas and not in vacuum.  Mr. Zimmern, however, agrees that the word unconscionable can be ignored.

34. I agree. If paragraphs 17 and 18 are not struck out as I have decided above, the plaintiffs’ claim for accounts for the defendants’ breach of fiduciary duties under the employment agreements will remain even if paragraph 21 were rectified to simple breach of the employment contract as proposed by the defendants.  The defendants are not taken by surprise.

35. Paragraph 21 should not be struck out on the ground as complained.

Costs and order

36. As to the costs of the applications, there is no reason that the plaintiffs should not bear the costs of and occasioned by their amendments to their Statement of Claim.  The costs are to be taxed, if not agreed, in any event.

37. As to the costs of the defendants’ application for striking out, the costs should follow the event.  The plaintiffs have given this Court two schedules of costs, one for the amendment and the other for the striking out.  I am to merge them together and make the assessment accordingly.  Taking a broad brush approach for the assessment, the plaintiffs’ costs for the striking out and the hearing on the amendment be assessed at $100,000, inclusive of all costs reserved in the meantime.

38. As to other defendants, since the plaintiffs are not asking for costs against them, I shall make no order as to costs for this hearing.

39. The Court now makes an order in terms as follows:

a. The plaintiffs’ application for amendment be allowed and, by consent, service thereof be dispensed with;

b. The 5^th and the 6^th defendants’ application for striking out be dismissed; and

c. The costs of the applications be as per paragraphs 36-38 supra.