CADENCE DESIGN SYSTEMS ASIA LTD. AND ANOTHER v. CHARLES WONG CHUN CHAN

CACV 287/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 287 OF 1999

(ON APPEAL FROM HCA 7756/1996)

----------------------

J U D G M E N T

----------------------

Hon Rogers JA :

Introduction

1. This is an appeal from a judgment of Deputy Judge Muttrie dated 18 August 1999 following a trial in July of that year. The defendant was held liable to pay the plaintiffs the sums of US$96,811 or its Hong Kong Dollar equivalent and a total of RMB148,335.73 together with interest. The defendant's counterclaim was dismissed. This appeal relates only to the US dollar amount and RMB78,753.73 being that part of the full amount which relates to the claim made in respect of two leases.

Background

2. The plaintiffs are both now subsidiary companies of Cadence Design Systems, Inc. ("Cadence"). Cadence is a United States company engaged in the production and sale of specialised computer software which is referred to as Electronic Design Automation Software. This is not for use in ordinary computers but is used, in the course of design of integrated circuits, for software simulation and the preparation of the printing tools for the circuits.

3. The appellant, who was the defendant in the court below is a highly qualified engineer and is now the Sales Manager in Beijing for a large and well-known computer company.

4. Cadence's products were initially marketed in China through agents. One of those agents was Modern Devices Limited. The defendant had, in the early 1990s, been the director of Marketing and Technology of Modern Devices. Modern Devices were apparently not the only distributor of Cadence software in the PRC in the early 1990s and indeed, it is suggested that the conflict between the distributors, in the end, led to an unsatisfactory situation which caused Cadence to terminate its relations with other distributors.

5. The 1st plaintiff, which, for convenience, I shall refer to as "Cadence Asia", was established in 1985. Cadence Asia was the Far Eastern distributor and sales agent for Cadence and there was, in existence, at least by 1995, a Marketing and Technical Support Service Agreement between the two companies. It is unnecessary to examine the details of that save to say that it appears that Cadence Asia had overall responsibility for Cadence's business affairs in South East Asia.

6. The defendant left Modern Devices in 1993 and he set up two companies of his own. One was ReMA Science & Technology Limited ("ReMa S &T") and the other was ReMA Enterprises Limited ("ReMA Enterprises"). ReMa S & T also became a distributor of Cadence products in China.

7. In the course of setting up business in China, the defendant says he was given a great deal of assistance by a man named Liu Jing Jing. Mr Liu features to a considerable extent in the events surrounding this case. According to the defendant, Mr Liu was well connected. His father had an influential position in the People's Daily Newspaper and Mr Liu himself was able to exploit his connections.

8. Towards the end of 1993 and the beginning of 1994, it is clear that the defendant must have developed close connections with the management of Cadence. The defendant arranged for the formation of the 2nd plaintiff, Cadence China. Originally there were only 2 shareholders, the appellant and one of the marketing personnel of Cadence Asia. Whatever the original intention was, in March 1994, ReMA S & T, Cadence, the 2nd plaintiff and the defendant reached an agreement which was entitled Agreement and Release which provided in effect that Cadence China would either be dissolved or the shares would be transferred to Cadence that ReMA S & T would cease to be a distributor or agent for Cadence products and that after the defendant had joined Cadence as an employee, he would cease to have any relationship with any other business that may conflict with the interests of Cadence.

9. As a result of the Employment Agreement which is dated 28 March 1994, the defendant was employed as the General Manager of Cadence China with effect from 1 January 1994. As recorded in the judgment, he was paid by Cadence Asia and all operations in Beijing were funded by Cadence Asia. The defendant became, in effect, the controlling mind of Cadence's business in Beijing. There is a report dated 27 April 1994 from the defendant to Mr Thomas Lui, who was the Vice-President of Cadence Asia Pacific Operations, dated 27 April 1994 where the defendant said that he would come up with a comprehensive proposal by mid-May for the personnel which were needed. It is clear from his report that the defendant was the person who was responsible for organising and arranging the activities of Cadence and its subsidiary companies in Beijing. It is also clear that the defendant had some cash flow problems and was urging an immediate remittance of funds.

10. The issues in this appeal turn upon the leases of 2 office rooms which were taken in the name of Cadence China. The first lease in respect of the first property ran from 20 June 1994. It was signed on 27 June 1994. It was for a period of 5 years, initially at the rate of US$87,360 per year. It was for room no. 999 in the Ritan Commercial Building. This was referred to in the judgment below as the first lease.

11. The second lease was for room no. 1002, also in the Ritan Building at a rent of US$24,200 per year. The lease was dated the 25 August 1995.

12. The rent on the first lease was increased in June or July of 1995 to US$100,464 per year. There is no dispute that these leases were arranged by Mr Liu. The leases were stated to be from an entity called Hainan Provincial Trade Promotion Import/Export Corporation ("Hainan"). The plaintiffs gave evidence at the trial that no trace could be found of Hainan in any directory and, furthermore, that the address which had been given for Hainan did not exist. The rent was not paid to an account in the name of Hainan but it was paid to an account in the name of Meng Duan. Who Meng Duan was does not seem to have been explored. The judge found in his judgment that the defendant had represented to the plaintiffs and Cadence that Hainan could not receive payments in foreign currency and that it was therefore necessary for the rent to be paid to the account of an individual.

13. After both the defendant and Mr Liu, for separate reasons, had left Cadence and its subsidiary's employment, Cadence came to know that the landlord of the Ritan Building was one Beijing Zhaori Science & Trade Development Company ("Zhaori") that that company had granted an initial lease on 20 June 1994 and a subsequent lease on 20 June 1995 in respect of room 999. The initial lease had been for US$60,000 per year and the subsequent lease for US$65,090. There was an addendum to the subsequent lease which set out that Hainan was renting room 999 to Cadence China and that all rent and telephone charges were payable by Cadence China. It was also discovered that there was a lease dated 9 June 1995 in respect of room 1002 from Zhaori to ReMA Enterprises. The rent was US$16,319 for a period of one year from 1 September 1995.

14. In December 1995, following a delay in the payment of rent, the defendant had asked Miss Alice Lee, who was the Senior Finance and Administration Manager of Cadence Asia, if he could pay an advance to the landlord. That request was refused but the defendant signed an IOU to Cadence China for RMB78,735.73 which he said at the time was for payment of a deposit to Hainan against the overdue rent.

15. Following that in 1996, the defendant informed Cadence Asia that the landlord wished to terminate the lease of the offices and that it had exercised the right of termination. There were faxes which were sent to Miss Lee in April 1996 from Cadence China which included an extension notice which purported to extend the leases for two months and the demand notes for extra rent and handling charge. According to Miss Lee's evidence, she told Mr Liu, who by then was the Office Manager in Beijing, that this was too much and the amount should be negotiated down. Ultimately, a reduced rent was received and Cadence Asia remitted US$27,010.54 to Meng Duan's account by 2 separate remittances on the same day. The defendant left the Cadence organisation. There is a signed Separation and Release Agreement which is dated 18 March 1996.

16. On the basis of the above facts, the plaintiffs brought action against the defendant for fraudulent misrepresentation and, in the alternative, negligent misrepresentation. The misrepresentations which were alleged were :-

1. In the first place, the express representation that because Hainan could not receive payments in foreign currency, it was necessary to use an account of an individual, namely Meng Duan, to receive the payments.

2. In the second place, the implied representation that the leases were genuine arm's length commercial leases and that the rent represented commercial or market rental.

3. Then, the representation that the sum of RMB78,735.73 which was taken from the funds of Cadence China represented a security deposit which had been demanded by the landlord because of alleged late payment of rent.

4. Finally, a representation that Hainan had agreed to extend the leases from 19 April 1996 to 19 June 1996 for a rent of US$10,388.67 per month, a penalty of US$6,223.20 and a rental deposit of US$20,777.34.

17. The judge found that the defendant had made these representations, that they were false that the plaintiffs had acted thereon to their detriment, in respect of the fourth representation to the tune of paying US$27,010.54. It must be observed that the judge acquitted the defendant of complicity in any fraud which had been practised on the plaintiffs and he also held that the defendant had not been reckless. He held, however, that he had been negligent in making the representations.

18. The defendant's case on this appeal is firstly that the plaintiff had not proved the loss which it was held to have suffered and secondly that the Separation and Release Agreement signed between Cadence and the defendant extinguished any liability which the defendant may have incurred in respect of any negligence or dereliction of duty. It is also said on behalf of the appellant that the judge should not have found him to be negligent.

19. Although the points were argued in a different order, it is, in my view, more convenient to take the question of negligence first. It is said that the defendant had not been negligent but rather had been duped himself by Mr Liu. It is his case that it was natural and necessary for foreigners doing business in Beijing, particularly in 1994, to have their affairs arranged for them by local "lieutenants". The judge, having found that the defendant could not be implicated in the fraudulent design, of Mr Liu, should have held that the defendant was not negligent in relying upon Mr Liu. It was said that the judge went too far when he said that if a foreigner were to rely upon a person in the position of Mr Liu, he :-

"must watch him like a hawk, lest he is following some agenda of his own, such is the practice of cheating the foreigner; a practice well known in all cultures and by no means uncommon in Hong Kong."

20. In his written submissions, Mr Yau on behalf of the appellant, placed stress upon the fact that this was a point which was raised by the judge for the first time in submissions and it is said it did not form part of the plaintiff's case.

21. For my part, I consider that the judge was fully justified and indeed, charitable in viewing the defendant's actions as cavalier. Two matters are of particular significance. In the first place, the defendant entered those leases in the name of Cadence Asia by short-circuiting Cadence's standard procedures. Albeit Cadence, and the 1st plaintiff, would have been aware that the defendant had not complied with Cadence corporate procedures for leases, it behoved anybody seeking to take the short-cuts, which the defendant clearly did, to be careful. In the second place, the payment of substantial rent to an individual who has never been properly identified and has not even been shown to be a director of the so-called landlord is a matter which I view as particularly irresponsible. When coupled with the fact that receipts were not obtained, I can only view that as a dereliction of duty.

22. Further, the defendant's extraction of RMB78,735.73 despite contrary instructions is a matter which seems to me to be indefensible.

23. Taken as a whole and in particular in view of the fact that the judge below gave the defendant the benefit of a doubt on at least two important matters, namely the fact that the ReMA chop had been used in respect of the second lease without the defendant's knowledge and it was not the defendant's signature on the 1995 lease of room 999, I consider that the defendant was fortunate. His carelessness had clearly brought suspicion on himself and the plaintiffs had justification for concluding that the circumstances were sufficient to bring the serious claim, which impugned the defendant's integrity as well as his competence, despite the fact that that claim ultimately failed.

24. Mr Yau placed considerable stress in the course of argument on the fact that in 1994 obtaining suitable office premises in Beijing was extremely difficult. This he said justified the defendant's implicit reliance on Mr Liu who had shown himself capable of achieving a number of things which required influence, to say the least.

25. I accept that the appellant was, no doubt, a dynamic salesman who was concerned and, no doubt, skilled at securing sales of computer software and in training sales staff. No doubt, once he had found the sort of accommodation which he considered appropriate for a company of the standing of the plaintiffs, the technicalities of leases and the red tape of negotiations were irksome. But in so far as he took it upon himself to circumvent the corporate procedures laid down by Cadence for itself and its subsidiary companies, he clearly took upon himself the responsibility of making the sort of inquires which would be expected of a reasonable man. One indication that he did not can be gleaned from the fact that as soon as Mr Yu took over Mr Liu's responsibilities, after the latter had been admitted to hospital, he found no difficulty in locating the true landlord and securing all relevant information about the lettings including copies of the leases. When the appellant went further, as he did in his witness statement and said that people doing business in Beijing had learnt not to ask too many questions, that to my mind, is indicative, at best, of turning a blind eye to something which clearly may prove to be underhand, in a situation where somebody and in this case the plaintiffs, would suffer. At worst, it is indicative of complicity in corruption and fraud.

26. I consider that the judge was amply justified in saying as he did :

"He showed a complete lack of prudence in managing his employer's affairs in relation to these leases.

The evidence of negligence is overwhelming. I have no doubt that the Defendant was negligent in his failure to carry out any checking of the genuineness of Hainan and the leases. He simply did not carry out the kind of checks that any normal businessman might be expected to carry out. At the same time I cannot say that the likelihood of his or Cadence's being duped was so blatant and obvious as to allow me to find that he recklessly closed his eyes to it.

I find that the Defendant's representations in respect of the leases were negligent."

27. The appellant argues that it has not been shown that the plaintiffs had suffered any loss because they could not prove what the proper rent was for the rooms nor indeed that they could have obtained their rooms without Mr Liu's intervention, still less, at the price for which he had paid. Indeed, it was said that the plaintiffs had not shown what rent it was that they paid for the premises in July nor the rent which they had paid for the premises to which they moved when they moved out of the Ritan Commercial Building after July. It was also said that the plaintiffs had not shown what might have happened had they known the real facts before the leases were signed, would they, for example, not have entered the leases and rented the premises, or, if they had approached Zhaori themselves would they have been granted a tenancy.

28. In this respect, the judge relied upon the amount of the rent which had been paid to Beijing Zhaori. A receipt had been found in Mr Liu's desk after he had been admitted to hospital. It was dated 12 April 1996 and it showed that the party which paid the rent for rooms 999 and 1002 was Cadence China and that the rent had been RMB113,022.77. Taken at its face, it shows that the rent that Beijing Zhaori accepted for the 2 months from the end of April to the end of June 1996 was consistent with the rent in the leases granted by Zhaori. Whereas it was said on behalf of the appellant that this document was produced for the first time during the course of the evidence of Miss Lee, it does appear that it was disclosed on discovery as long ago as 1997.

29. But it seems to me that the matter must be looked at in this way. The premises were rented by Zhaori to what was, in effect, a fictitious entity. Zhaori cannot be taken, it seems to me, to have paid any attention to precisely who the tenant was. The rent which Zhaori accepted must, on the face of matters, be taken to be the proper rent. If the defendant wished to say that there was a special rent for Mr Liu or that Cadence China could not have been granted a lease, it was up to the defendant to show it. In the absence of that, the court can only come to the conclusion that a secret profit was made by Mr Liu and any associates that he may have had. That secret profit was over and above the proper rent for the property. It was the misrepresentation, made by the defendant, which the judge had held to be negligent, which enabled this to happen. In my view, that is a proper quantification for the loss which was suffered.

30. Finally, the appellant seeks to rely upon the Separation and Release Agreement signed when the defendant left the Cadence organisation as absolving him from any liability for negligence. That Agreement starts off by reciting the parties and saying :-

"By mutual agreement, Employee's employment with Company will terminate on 3/18/96 (Termination Date) based upon terms set forth below :"

It then sets out that to which the employee is entitled that namely, first of all, the remuneration; secondly, vacation rights; thirdly, the medical benefits which had to cease in June 1996. Then, it turns to question of stock options and bonuses and finally, the termination.

31. There is a lengthy clause on the second page of the Agreement which limits the employee's rights for in respect of anything further. That reads as follows :-

"Employee acknowledges that he had no claims against the Company based on his employment by Company of his separation therefrom and releases Company, its parent, its subsidiaries and its affiliates, officers, agents and employees from all causes of actions, claims, suits, demands or other obligations or liabilities, whether known or unknown, that Employee ever had, now has, or may in the future have, that may be alleged to arise out of or in connection with his employment with Company, or separation therefrom, including, not by way of limitation, any claims for wages, bonuses, or expense reimbursement, and any claims that any terms of his employment with Company or any circumstances of his separation were wrongful, in breach of any obligation of the Company or in any violation of any rights, contractual, statutory or otherwise, of Employee, including but not limited to rights arising under federal and state age discrimination and older workers protection statutes."

32. The appellant places great stress on the final paragraph of the Agreement which reads :-

"This Agreement is intended by the parties to be a complete and final expression of their rights and duties respecting the employment of Employee by Company, and the separation of Employee from the Company. This Agreement may not be modified unless such modification is embodied in writing, signed by the party against whom the modification is sought to be enforced."

33. On the basis primarily of that clause, Mr Yau has argued that rights equivalent to the rights of the employer against the employee should be taken as written into this Agreement and thus it would prevent the employer from making any claim for negligent misrepresentation which arose during the course of the employee's employment.

34. For my part, this argument must fail. In the first place, the words of the Agreement do not cover an exception for negligent misrepresentation either expressly or impliedly. The Agreement is clear, in my view, it limits the rights of the employee. It may be one-sided in certain respects but, nevertheless, that is what the Agreement purports to do. There can be nothing implied, as it seems to me, from the final paragraph of the Agreement which would limit the rights of the employer to recover in respect of negligent misrepresentation. In this case, in any event, the contracting party was Cadence but the employer was Cadence China, the 2nd plaintiff.

35. In the second place, it seems to me that the words in the final paragraph concern rights and duties respecting the employment and not rights and duties which may be said to arise out of a negligent misrepresentation albeit they may have been made during the period of employment.

36. In the third place, it seems to me that the judge below was correct in saying that these broad words which were contained in the final paragraph cannot be read as covering matters of negligence of which the employer was ignorant at the time of the signing of the Agreement. It was said in this respect that Cadence and, indeed, the plaintiffs were fully aware that the defendant had not complied with the Cadence's corporate requirements for entering leases. That is of course so. But in my view, that does not begin to show that the plaintiffs were, or should be taken to have been, aware of the fact that the various representations which had been made were inaccurate and had been made negligently. In my view, this defence must also fail.

37. For these reasons, I would dismiss this appeal.

Hon Sakhrani J :

38. I agree that the appeal should be dismissed for the reasons given by Rogers JA.

Hon Ribeiro J :

39. I agree. I would like to add a word about one particular submission advanced by Mr Yau on the defendant's behalf. He stressed that business was and is still is done on the Mainland by reliance upon persons possessing guanxi or good connections. That, I am sure, is generally an accurate statement. He argued that Liu Jing Jing was such a person and had proved himself an effective "fixer" in the past. Mr Yau contended that this, in the context of what he called the different commercial culture on the Mainland, in some way helped to excuse the defendant for his failure to supervise Liu Jing Jing's activities.

40. I have to say that I consider that a potentially pernicious argument which cannot be accepted. In many commercial transactions, the services of an intermediary having good connections may be essential for a deal to be struck. This generally means that the intermediary is rewarded, whether by being paid a broker's commission, an agency fee, a finder's fee or otherwise. In the present case, Liu Jing Jing was evidently placed on the 2nd plaintiff's payroll for his services. That was no doubt the intended incentive for the provision of such services, at least as far as the plaintiffs were aware.

41. The need for the services of a useful intermediary does not mean that it is proper for the company's management to ask no questions and to allow the Intermediary unlimited leeway to make a secret profit on any deal that he brokers. Reward from his principal for services rendered must be honestly and openly claimed and agreed to by the principal. However useful Liu Jing Jing may have been in the past, in my judgment, the defendant failed in his duties by failing properly to manage or supervise Liu in his activities in relation to the leases in question.

Accordingly, the representations which the defendant made were made without any reasonable basis and I am in no doubt that the learned judge was correct in his finding of negligence. I am, therefore, also of the view for the reasons given by Rogers JA that this appeal must be dismissed.