FOUR SEAS FISH BALLS CO LTD v. YEUNG HUNG SIN AND ANOTHER

HCA 4159/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4159 OF 2003

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J U D G M E N T

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Introduction

1.  The plaintiff commenced this action in November 2003, alleging:-

(a) the defendants to have breached two verbal agreements respectively made in April 1997 and August 1998;

(b) the 1^st defendant (“D1”) to have breached his common law duty of care and fiduciary duty.

The plaintiff further claims that, if in fact D1 had no authority to enter into the said two agreements for the 2^nd defendant (“D2”), D1 should be liable for want of warranty of authority.

2.  The allegations are denied by the defendants.

Background Facts

3.  The background facts are largely undisputed and can be summarised as follows.

4.  The plaintiff was formerly a partnership business which commenced business in March 1977.  The founding partners were the four Tong brothers and D1 (who was acquainted with one of the Tong brothers).  The word “Hoi” appears in the names of all the Tong brothers and so the business was called “四海食品公司”.  The partnership operated from a shop space in a public housing estate which was registered in D1’s name.

5.  D1 has taken care of the accounting and financial matters of, and the purchase of materials for, the partnership.  The partnership’s business was the sale of fish balls and braised beef brisket.

6.  In 1986, the plaintiff was incorporated to operate the partnership’s business.  By 1993, the plaintiff has set up a production factory in Shenzhen.  By 1999, Tang Hoi Tung (“PW1”) held about 57% of the plaintiff’s shares (59% in 1996).  Some of the Tong brothers have left and a Mr Cheng Sui Kei (“Cheng”) (in 1996) and a Mr Chan Tong Wing (in 1999) became shareholders.

7.  PW1 described himself as the plaintiff’s chairman (of the board) and general manager in his witness statement.  He was responsible for the plaintiff’s production and was in charge of its factory in Shenzhen.  D1 was the plaintiff’s assistant general manager.  Cheng assisted D1 in the plaintiff’s operation in Hong Kong.

8.  It is unclear precisely when the plaintiff’s business started to flourish.  The plaintiff’s case is that its business grew tremendously since early 1998 with the successful introduction of the curry fish balls.  In any event, by the end of 1996, its annual profits began to fall into the HK$20 to 30 million region.

9.  D1 submitted his resignation in October 2002.  Further, there was negotiation between him and PW1 regarding the purchase of D1’s shares in the plaintiff.

10.  The witness statements have not gone into the details of the negotiation referred to in the preceding paragraph.  But it can be gathered from the witness statements that the relationship between D1 and PW1 became less harmonious since about mid-2002.  This must have further deteriorated with the parties’ differences regarding the price at which D1’s shares should be purchased.

11.  D2 (D1’s wife) has been practising as a Chinese herbalist in the name of “Wui Sang Tong” (回生堂).

12.  Between November 1997 and November 2002, D2 supplied to the plaintiff ground white pepper (古月粉) for manufacturing fish balls.

13.  Between August 1998 and February 2003, D2 also supplied to the plaintiff curry, five-spice powder（五香粉）and flavourings for manufacturing fish balls.

14.  D1 formally retired in October 2000 but he only ceased to work for the plaintiff in early 2003.

Disputed Facts

15.  The first main issue is whether the defendants have entered into verbal agreements with the plaintiff:-

(1)     in April 1997 whereby D2 was to be the plaintiff’s sole supplier of ground white pepper on condition that D2 would supply the same at fair market price (together with the operating cost of grinding) without charging any profit (“the alleged Apr 97 agreement”);

(2)     in August 1998 whereby D2 was to be the plaintiff’s sole supplier of curry, spice and other flavourings on essentially the same conditions (“the alleged Aug 98 agreement”)

(collectively “the alleged agreements”).

16.  Related to the above is whether D2 has in effect ratified the alleged agreements respectively in July 1998 and July 1999.

17.  The second main issue is whether D1 owed to the plaintiff a common law duty of care and/or a fiduciary duty to ensure that D2 abide by the alleged agreements.

18.  The third main issue concerns the quantum of loss suffered by the plaintiff if the court should find the defendants to be liable.

Witnesses’ Credibility

19.  The following witnesses testified at trial.  Witnesses testifying for the plaintiff were:-

(1) PW1;

(2) Tong Hoi Pun, PW1’s brother and the person-in-charge of the plaintiff’s warehouse in Hong Kong (“PW2”);

(3) Ms Po Kwai Han, the plaintiff’s senior accounts clerk (“Ms Po”);

(4) Cheng;

(5) Chan Chor Wing, the plaintiff’s personnel and administration manager (“Chan”).

On the other hand, witnesses testifying for the defendants were:-

(a) D1;

(b) D2;

(c) Kwok Hon Chung, the sole proprietor of Hop Hing Trading Co. (D2’s supplier of the required raw materials) (“Hop Hing”).

20.  In assessing credibility in order to make a finding of fact, the tests adopted for such assessment are as those stated in the judgment of Star Glory Investment Ltd. v. Kai Tuo (H.K.) Technology Co. Ltd. and Others, HCA 3523/2002:-

“The assessment of a witness's credibility and/or reliability is a task frequently undertaken by the court in litigation (in fact, very often an essential task).  I consider the following to be the appropriate test to adopt:-

‘There are two objective tests for assessing a witness's credibility regarding a matter to which he has testified:-

(a) whether that part of his testimony is inherently plausible or implausible;

(b) whether that part of his testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable (an example often given of such evidence is contemporaneous documents).

Further, where it is shown that a witness has been discredited over one or more matters to which he has testified (using the above tests), this fact is relevant to the assessment of his overall credibility.  Likewise, regard may be had to a witness's motive for deliberately not giving truthful testimony.  For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest’.

(See, for example, the decisions in Chiu Chi Tong v. Lau Chong Sai HCA 765/2002 (para. 28) and Yu Ming Investment Ltd. v. Pang Ru Chuan, Richard HCA 814/2002 (para. 13))”.

Reliability of the witness, being his ability to observe, recall and recount the relevant events, is not in issue herein.

21.  By reason of the matters set out below, I accept the defence witnesses to be truthful and reliable, and reject the testimony of the plaintiff’s witnesses (except Ms Po’s).

Breach of Contract

22.  The plaintiff’s case based on breach of contract is premised on the following.

23.  One of the ingredients for making fish balls is pepper.  Before 1997, pepper was supplied by several enterprises, including one “AA” or “紅聯調味料”, “Kung Cheong Wo” (公昌和) and “Kam Hing Hong” (錦 興行).  However, the quality of pepper was unstable.  Sometimes, the pepper was of very poor quality and could not be used at all.

24.  As a result, PW1 called for a meeting in April 1997 which was attended by PW1, PW2, D1 and Cheng.  Shortly after the meeting commenced, D1 proposed that raw pepper be purchased and it could be ground to powder form for use.  He said D2 could help the plaintiff to do so.  D1 also said that D2 would make sure the purchase would be at fair market price, that the additional cost for grinding the pepper would be small and that no profit would be made by him or D2.  As those attending the meeting knew D2 was a Chinese herbalist and was familiar with Chinese herbs, everyone agreed to the proposal and the matter was not discussed further.

25.  PW1 met D2 at a social gathering in July 1998.  PW1 thanked D2 for helping to purchase pepper and D2 replied that it was fine with her.  She also assured him neither she nor her firm would make any profit out of the arrangement.

26.  Curry is required for manufacturing curry fish balls.  Since mid-1997, with the increase in demand for curry fish balls, PW1 feared that the plaintiff’s supplier, “Kung Cheong Wo”, which was a small retail shop, might not be able to cope with the increase in quantity.  He therefore called for another meeting in August 1998.

27.  Shortly after the meeting commenced, D1 again suggested D2 to help purchase curry, spice and other flavourings for manufacturing curry fish balls.  He said the arrangement would enable him to monitor and control the purchases for the plaintiff.  Those who attended meeting agreed to the proposal.

28.  At another social gathering in July 1999, PW1 again expressed his gratitude to D2 for her help.  D2 said she was glad to do it for the plaintiff and she would not make any profit for doing so.

29.  The defence case regarding this aspect of the litigation is as follows.

30.  It is agreed that a meeting attended by PW1, PW2, Cheng and D1 was held in April 1997.  Concern was raised regarding the quality of pepper supplied by the then suppliers.  PW1 proposed the plaintiff to purchase pepper from D2.  D1 said he would ask D2 to try to do so, and D2 agreed to try after considering the matter for a few days.  But it was never mentioned that D2 would be the plaintiff’s sole supplier of pepper, nor that she would not make any profit for supplying pepper to the plaintiff.  In fact, after November 1997, the plaintiff also purchased pepper from suppliers other than D2, including “Kung Cheong Wo”.

31.  Likewise, it is also agreed that there was a similar meeting held in August 1998.  Because the demand for curry had increased, it was feared that the then supplier “Kung Cheong Wo” might not be able to supply the required quantity of curry.  PW1 therefore suggested that D2 could help to supply curry.  D1 agreed to ask D2 to do so, and she agreed to try after a few days.  It is denied that D2 would be the plaintiff’s sole supplier of curry, or that she would not make any profit for supplying curry to the plaintiff.

32.  According to the plaintiff, the alleged agreements both resulted from concerns raised by PW1.  The Jul 97 agreement was brought about by the unstable quality of an ingredient important to the manufacture of fish balls.  In relation to the Aug 98 agreement, it was the fear that the demand for curry could not be met.

33.  If suppliers who specialised in the trade have caused the plaintiff concern, there could only be more reasons for its directors to be concerned with the performance of a new supplier who was never known to have done so.  In these circumstances, it was inherently implausible that the matter was:-

(1) not discussed in detail at the two meetings in question.  Moreover, although there was no evidence D1 knew about the matters beforehand (and hence quite probably has not discussed with D2 about the viability of obtaining supply), he immediately promised that D2 could help the plaintiff to obtain the raw materials.  This is despite suppliers who specialised in the trade have not been able to do so satisfactorily earlier;

(2) not followed up (or at least monitored) by the other directors at all subsequent to the two meetings in question.

34.  But what is crucial to this action was the plaintiff’s knowledge (through the other directors) of the fact that D2 was in effect making a profit out of the alleged agreements.  As the plaintiff’s director witnesses admitted, D2 was only known to be a Chinese herbalist who also operated a firm “Wui Sang Tong” which, in short, sold Chinese herbs.  It must have been obvious to them D2 would have to obtain the raw materials from somewhere else, probably other suppliers which specialised in the trade.  Yet strangely enough, the plaintiff (as a consumer) never asked about her source of supply.  This usually only happens where the supplier is considered by the consumer to be entitled to keep its source confidential (commonly the case where there is a trading relationship between the supplier and the consumer).

35.  When he was cross-examined, PW2 testified more than once that the prices charged by D2 were far higher than what he expected to be fair market prices; price differences of around HK$20 (price charged by D2) compared to HK$6 to HK$8 (prices considered to be fair).  PW2 was in charge of the plaintiff’s warehouse in Hong Kong (to which the raw materials supplied by D2 were delivered).  He admitted in cross-examination he had read the contents of the invoices which accompanied the goods at the time of delivery.

36.  It is therefore obvious he ought to be aware of the “excessive” prices charged by D2.  But not only did PW2 raise no objection, he never informed the other directors of the above.  I find this hard to believe.

37.  Fish balls are a common snack in Hong Kong; they are commonly sold in food stalls, supermarkets and the like.  However, few people would expect such a food item to turn a business venture into an enterprise with an annual turnover in terms of tens of million of dollars.  Those standing behind the plaintiff must have been either very lucky or very shrewd businessmen (or both).

38.  PW1’s background shows every sign of a shrewd businessman.  He came from a relatively humble background.  The predecessor of plaintiff was a partnership located in a shop inside a public housing estate (provided by D1 at a fee), selling fish balls and braised beef brisket.  He was described in D1’s witness statement as “not well educated”.  But by the 1980’s he managed to obtain a business management degree through evening school.  His shareholding in the plaintiff increased from 35% in 1987 (incorporation) to 57% (in 1999) (the precise way in which he obtained the additional shares is disputed and needs not be considered).

39.  He admittedly was referred to at the office as “the big boss” (大老闆) (D1 was referred to as “the second boss” (二老闆)).  His signature was required for the plaintiff’s cheques (although some of these were pre-signed).

40.  His brother, PW2, was assigned to be in charge of the plaintiff’s warehouse.  Cheng, who he introduced to D1 (see Cheng’s witness statement, para. 2), started to work full-time with the plaintiff in 1999 to “assist [D1] on accounting matters, office administration, personnel and sales, of the Plaintiff’s business in Hong Kong”.  Chan, a chartered accountant, joined the plaintiff as its accounts manager at the end of 2001 (later promoted to personnel and administration manager).

41.  PW1’s demeanour in the witness box is consistent with the indications (summarised above) that he is a shrewd businessman.

42.  As stated above, Cheng was one of the directors.  He received tertiary education.  He worked under D1 and was assisted by Ms Po in relation to accounting matters.  Payment vouchers prepared by a staff in the accounts department (consisting of about 7 staff) and checked by Ms Po needed to be approved by him.  Cheng claimed in his testimony he was only concerned with the correct calculations in the payment vouchers and never with the appropriateness of the amounts therein.  I find the claim inherently implausible.  He also claimed he never heard of PW1 being addressed as “the big boss” or D1 being addressed as “the second boss”.  I consider these to be indications of an untruthful witness trying to distant himself from matters which he feared may shed light on his knowledge of the factual disputes in this action.

43.  With the above matters in mind, I find the claim of PW1, PW2 and Cheng regarding the alleged agreements, and their complete lack of knowledge of the way in which D2 obtained the supply of the raw materials, or the way in which the raw materials were charged by her, to have an air of artificiality and is incredible.

44.  On the other hand, I agree with the defence that the alleged agreements makes very little sense if looked at from D2’s point of view.  She has to spend time and expenses to try to locate (and maintain) a good source of supply, on a long-term basis (her evidence that the work was substantial was not challenged).  Yet she was not supposed to gain anything out of the arrangement.  Further, the alleged agreements which supposedly would make her the plaintiff’s sole supplier would in truth only confer on her a “right” which is commercially meaningless.  The plaintiff’s contention (which was also put forth in the testimony of some of the witnesses) that she would benefit because D1’s work would be made easier sounds contrived.

45.  Other points relating to credibility have also been made in the defendants’ final submissions, especially para. 12 to 17, 19 to 24 and 30.  They will not be repeated save that I also agree with them.

46.  I also agree with the defendants’ final submissions regarding the credibility of the defence witnesses.

Breach of Warranty of Authority

47.  Because the plaintiff has failed to establish the alleged agreements, this issue does not arise for consideration.

Breach of Duty

48.  This part of the plaintiff’s case is closely related to its case regarding the alleged agreements: para. 16, amended statement of claim; para. 1, plaintiff’s closing submission.

49.  Because the plaintiff has failed to establish the alleged agreements, to the extent this part of its case depends on them, it fails as well.

50.  Insofar as may be necessary to do so, and for the avoidance of doubt, from the evidence which I accepted, I infer that the plaintiff’s other directors have connived or acquiesced in (or at least were indifferent to) D2 making a profit out of her work in obtaining the raw materials.

51.  I also find that there is insufficient evidence to support the plaintiff’s contention that D1 has an interest in “Wui Sang Tong”, or has otherwise benefited from the sale of raw materials by “Wui Sang Tong” to the plaintiff.

52.  Accordingly, I do not consider this part of the plaintiff’s case to have been established either.

Quantum of Damages

53.  The defendants have not been found liable, so this aspect does not fall for consideration.

54.  Insofar as it may be necessary to do so, I agree with the defendants’ submissions regarding this aspect: para. 12 to 17 and 80 to 83, defendants’ final submissions.

Witness Statement of Kwok Ming Lam

55.  The plaintiff has filed and served a witness statement dated 6 December 2004 of a Mr Kwok Ming Lam (“Kwok”).

56.  According to the witness statement, Kwok is a self-employed light goods vehicle driver.  From 1997 to February 1998, he was employed by the plaintiff also as a driver, working under PW2.

57.  Kwok said at the end of 1997, D1 asked him to collect pepper from Hop Hing in the Western District.  D1 asked Kwok not to tell anyone about this.  Although he felt strange about this, he simply followed the instruction.

58.  Kwok said D1 also asked to tell Hop Hing the goods were collected for D1 or “Wui Sang Tong”, which he did.  Kwok did not need to collect raw materials from other suppliers while he was with the plaintiff.

59.  Kwok remembered having been to Hop Hing to collect pepper once from 1997 to February 1998.  After he became self-employed, he continued to deliver the plaintiff’s finished products to customers.

60.  In 1998, D1 again asked Kwok to collect pepper and other goods from Hop Hing until April 2003.  D1 also asked Kwok not to tell anyone of the plaintiff about the work.  He estimated there were about 30 collections.

61.  Kwok has an impression that D1 was related to “Wui Sang Tong”, or its boss.

62.  The plaintiff did not call Kwok to testify.  Counsel informed the court during trial that Kwok had disappeared and could not be located.  Later, the plaintiff’s solicitors filed and served an affirmation dated 21 July 2006 stating that:-

(a) the subpoena was served personally on Kwok on 23 June 2006;

(b) when Kwok failed to appear in court on 19 July 2006, they tried to telephone him several times but no one answered.  They went to Kwok’s home and was told he was not there;

(c) Kwok spoke to them over the telephone on 20 July 2006 and claimed that the defendants had been very good to him.  He felt ashamed to appear in court to face them.  Kwok also said if he testified, he would say he could not remember anything.  Although he confirmed the contents of his witness statement over the telephone, he claimed he would overturn his witness statement in court.

63.  S. 47(1), Evidence Ordinance (Cap. 8) provides:-

“In civil proceedings evidence shall not be excluded on the ground that it is hearsay …”.

64.  Further, s. 49, Cap. 8 stipulates:-

“(1) In estimating the weight, if any, to be given to hearsay evidence in civil proceedings the court shall have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence.

(2) For the purposes of subsection (1), regard may be had, in particular, to the following-

(a) whether it would have been reasonable and practicable for the party by whom the evidence was adduced to have produced the maker of the original statement as a witness;

(b) whether the original statement was made contemporaneously with the occurrence or existence of the matters stated;

(c) whether the evidence involves multiple hearsay;

(d) whether any person involved had any motive to conceal or misrepresent matters;

(e) whether the original statement was an edited account, or was made in collaboration with another or for a particular purpose;

(f) whether the circumstances in which the evidence is adduced as hearsay are such as to suggest an attempt to prevent proper evaluation of its weight;

(g) whether or not the evidence adduced by the party is consistent with any evidence previously adduced by the party”.

65.  The parties dispute the weight to be given to Kwok’s witness statement, but the admissibility of the same is undisputed.

66.  Before dealing with the way in which the discretionary power under s. 49, Cap. 48 should be exercised in this action, it is necessary to consider the use to which the plaintiff’s solicitors’ affirmation can be put.

67.  That affirmation can be admitted for the purpose of establishing the matters set out in s. 49(2)(a) and/or (f), Cap. 8.

68.  It is unclear if the plaintiff also seeks to adduce the plaintiff’s solicitors’ affirmation for the purpose of establishing that on 20 July 2006 Kwok had confirmed the contents of his witness statement over the telephone.  But even if the plaintiff should seek to do so, I do not consider such confirmation can advance the plaintiff’s case; a witness’ credibility or reliability cannot be improved by his repeated confirmation of his testimony (or, as in this action, his intended testimony).

69.  In commenting on s.4, Civil Evidence Act 1968 in England (a statute similar to, but not exactly the same as, our s. 49, Cap. 8), Phipson on Evidence (2005) 16^th Ed., said:-

“For many years there has been a contrast between the strict rules of evidence set out in the textbooks and the rules applied in the civil courts on a daily basis, where evidence is regularly admitted without consideration of the rules of hearsay.  The bundles of documents put before the court are often treated as though their contents are evidence without any point being taken and without problems arising.  The Act seeks to narrow the gap between theory and practice.

The other provisions of s. 2(4) [provisions similar to our s. 49(2)(b) to (f)] are largely matters of common sense … ” (para. 29-07);

“The Act is not intended to provide a substitute for oral evidence.  The basic principle under which the courts operate is that evidence is given orally with cross-examination of witnesses, and the admission of hearsay evidence is, and should be, the exception to the rule.  Caution should be exercised before tendering important evidence through hearsay statements.  Hearsay evidence is better used where the evidence is peripheral or relatively uncontroversial.

Faced with a conflict between a written statement not tested by cross-examination and oral evidence, the judge will usually prefer the oral statement. …  Brandon J. … considered it was wrong to try the central issues in an action by means of unsworn documents which in many cases had been brought into existence after the commencement of litigation.  There have been numerous similar comments from judges, albeit at times more moderate” (emphasis supplied) (para. 29-15).

70.  Having considered the whole circumstance, I prefer the contents of the defence testimony to those of Kwok’s witness statement.

71.  Even taking into account Kwok’s assertion for not attending court (as described in the plaintiff’s solicitors’ affirmation), Kwok appears to be a person who is prepared to say things which suit his own purpose.

72.  Kwok’s witness statement was drafted in English and, on its face, has to be translated to him before he signed it.  It was prepared after the commencement, and specifically for the purpose, of this action.  It is unclear how much of its contents is in fact Kwok’s own expression (as opposed to the draftsman’s interpretation of what he said).

Conclusion

73.  The plaintiff’s claim is dismissed.

Costs Order

74.  Subject to qualifications which do not arise by reason of the conclusion reached above, the parties agree that the usual rule that costs should follow the event is applicable.  There will accordingly be a costs order that the costs of this action (including any reserved costs) be paid by the plaintiff to the defendants to be taxed if not agreed.