CHAN CHING HO, OWEN v. POON YUK KING

DCCJ1802/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1802 OF 2012

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JUDGMENT

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INTRODUCTION

1. This case involves a contractual dispute where the plaintiff is claiming damages for misrepresentation and/or breach of implied terms of the agreement in the sum of HK$696,865.00.

BACKGROUND

2. The plaintiff is an experienced businessman and a lecturer who teaches students on entrepreneur skills.  At all material time, he was and is the majority shareholder and the sole director of Puregreenx (Hong Kong) Limited (“Puregreenx”).   

3. The defendant has a PhD in pharmacy.  She was and is the sole shareholder and director of a company incorporated in Canada by the name of KYP Inc (“KYP”).  KYP engaged in the manufacturing and selling of natural herbal food products in Canada.  She personally designed and developed the formula for those products.  She is a minority shareholder of Puregreenx.  The defendant was a director of Puregreenx but ceased to be a director since her resignation on 13 December 2006. 

4. By a Chinese Agreement dated 1 November 2006, the plaintiff and the defendant agreed to set up Puregreenx in Hong Kong (“the Agreement”).  Under the Agreement, Puregreenx would become the exclusive distributor of KYP products (“the Products”) in Hong Kong and be responsible for the advertisement and sale of the Products.

5. The following are the relevant terms of the Agreement in English:-

(i)   Clause 1 of the Agreement provides, inter alia, that the parties shall co-corporate with each other in Hong Kong to run Puregreenx as the sole distributor and with full authority to promote and sell the products developed by KYP.  The company also undertakes to find agent and provide attestation service for the products and was planned to reach sales target of HK$3,000,000.00 within three years.  Upon reaching the said sales target, the plaintiff would be allotted with 50% of the shares of KYP. Should Puregreenx fail to reach the sales target of HK$3,000,000.00 within three years, the defendant shall be entitled to amend the Agreement upon calculating any losses or profits of the company.

(ii)   Clause 2 of the Agreement provides that, inter alia, during the operational period of Puregreenx and after the company has placed an order with KYP, should KYP fail to supply the required quality and quantity of products as according to the order from Puregreenx, Puregreenx shall be entitled to claim damages and compensation from KYP.

(iii)   Clause 3 of the Agreement provides, inter alia, that the administration costs of KYP shall be calculated by the basic costs plus a percentage of the service free (depending on the turnover of KYP), or according to the actual situation.  The parties shall bear in mind the precondition that Puregreenx shall serve as the base of the business, therefore, the administration costs of KYP should kept to the lowest.

(iv)   Clause 4 of the Agreement provides, inter alia, that except those products already developed and attested, if KYP or Puregreenx need to use irregular expenses for development of new items, the parties shall approve by resolutions.

(v)   Clause 5 of the Agreement provides, inter alia, that if any party decided to quit from the business without the consent of the other party, the loss and profit of the business shall be calculated and borne by the parties according to the proportion of their shareholdings.  The quitter shall not engage in any related business of Puregreenx within five (5) years.

(vi)   Clause 6 of the Agreement provides, inter alia, that the defendant as owner of KYP shall not co-operate or operate privately any business with the clientele and agent introduced by or through Puregreenx.  If the defendant breach the aforesaid, she have to return to Puregreenx all profits and compensate Puregreenx all expenses incurred from recovering the same.  The same term also applies to the plaintiff.

The plaintiff’s case

6. It is the plaintiff’s case that, in addition to the express terms stated in the Agreement, there are a number of implied terms for which the defendant has allegedly been in breach of.  Those implied terms have been pleaded in §13 of the re-re-amended statement of claim. 

7. In addition to the alleged breach of the implied terms of the Agreement, the plaintiff also alleges that the defendant is liable for fraudulent misrepresentation. 

8. The plaintiff claims that the representations were material to the Agreement and the defendant had induced the plaintiff to enter into the Agreement by using those misrepresentations.

The defendant’s case

9. In essence, the defendant’s case on the alleged breach of the implied terms of the Agreement is that:-

(1)   there was no such implied terms of the Agreement as alleged by the plaintiff;

(2)   even if there were, the defendant did not breach them.

10. On the alleged fraudulent misrepresentation, the defendant’s case is that the defendant did not make any misstatement of fact or law to the plaintiff and the plaintiff at all material time relied on his own judgement in entering into the Agreement.  As such, there was no inducement on the part of the defendant or reliance on the part of the plaintiff.  The defendant says that in any event the plaintiff’s case on fraudulent misrepresentation lacks in particularity and the plaintiff has failed to make out a case of fraud on the evidence presented. 

ISSUES TO BE DECIDED

11. The issues I have to decide in this case are:-

(I)   Whether the representations alleged by the plaintiff were made.  If so, were they false or untrue.  If they were untrue, whether the plaintiff was induced by and relied on them when entering into the Agreement.

(II)   Whether there are any implied terms in the Agreement as alleged by the plaintiff and was the defendant in breach of them.

(III)  The appropriate amount of damages if the defendant is found to be liable.   

DISCUSSION

(I)   Fraudulent Misrepresentation

12. The principle of fraudulent misrepresentation is well-established.  It is succinctly summarized by Recorder Edward Chan SC at §35 of Queenston LLC v Serlen Ltd HCA 7585/2000 (27 April 2001):-

“The essential ingredients for (fraudulent misrepresentation) are (a) the making of a representation to the plaintiff; (b) the representation was untrue in a material respect; (c) the defendants knew that the representation was untrue; (d) the plaintiff was induced to act on the untrue representation and (e) the plaintiff suffered loss and damage as a result.”

13. Where fraud is alleged, the plaintiff bears the burden of adducing cogent evidence to prove the allegation, as said by Muttrie DHCJ in China Everbright Finance Ltd v Chan Yung HCA 18300/1999 (24 October 2006) at §46:-

“Fraud is a serious allegation. The more serious the allegation, the more cogent must be the evidence to prove it. But the standard of proof is the balance of probabilities. There is a logical difficulty of requiring more cogent evidence on the fraud than otherwise, while still holding that the allegation is to be proved on the balance of probabilities but the resolution of this problem was explained in Re H (minors) [1996] AC 563. In that case the House of Lords held that even where a serious allegation is in issue, the standard of proof remains the same. Per Lord Nicholls:-

“… this does not mean that that where a serious allegation is in issue the standard of proof required is higher.  It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred.  The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”

14. The plaintiff’s fraudulent misrepresentation claim is based on 4 separate representations allegedly made by the defendant to the plaintiff before they entered into the Agreement.  They are:-

(a)   KYP was entitled to sell and market its products according to the governing laws and regulations of Canada;

(b)   The Canadian authorities had, only at that material time, recently invoked a licensing requirement for the sale of health supplements and that KYP was in the process of applying for the relevant and necessary licence for its products;

(c)   The Canadian authorities had put in place a transition period whereby products pending the application process could continue to be sold on the market, and that the defendant was confident that the said application would be granted and further assured the plaintiff that the application would be granted sooner rather than later; and

(d)   KYP was, at that material time, on the verge of breaking even financially and it would prepare its annual report in due course and that the annual report would reveal that KYP had broken even financially.

Telephone recordings

15. Before I deal with those alleged representations, I should dispose of one evidential matter first, namely, the recording of a number of telephone conversations between the parties by the plaintiff.  The plaintiff relies on those recordings as evidence of false representations being made by the defendant to the plaintiff prior to entering the Agreement.

16. Most of those conversations were recorded in secret without the knowledge of the defendant, although some were recorded with the consent of the defendant.  They have now been placed in a compact disc and the transcripts have been prepared by a translation/transcription service company and produced as part of the documents in the case. 

17. The parties agree that the transcripts of the telephone recordings are admissible evidence.  The only issue is how much weight the court should attach to them, given the fact that they were made a few months after the Agreement and most of those conversations were made with a view to “trap” the defendant when she was unaware that the conversations were being recorded.

18. Having listened to the audio recording and read the transcripts,  I come to the conclusion that the court should place very little weight on those recordings due to the following reasons:-

(1)   The recordings were made after the signing of the Agreement.  In order to show that the plaintiff had been induced into entering the Agreement, evidence will have to be produced to establish what was said by the defendant prior to the signing of the Agreement and not after.  In this regard, I note that all the conversations recorded by the plaintiff took place at least a few months after the signing of the Agreement. Hence, by its nature, it is difficult to see how they could assist the plaintiff as part of the “cogent evidence” that he must show in order to establish fraudulent misrepresentation against the defendant.

(2)   They are not complete record of the entire conversation.  It is clear that at least in several of the recordings, they were cut off abruptly in the middle of the conversation.  In my opinion, they were shortened and edited in order to contain information only helpful to the plaintiff’s case.  Without having the benefit of listening to the whole conversation, words can be taken out of context and contents can be easily misunderstood.

(3)   As agreed by counsel, most of those recordings were made clandestinely by the plaintiff without knowledge of the defendant.  It is submitted by Mr Hylas Chung, counsel for the plaintiff, that, on a few occasions the plaintiff had notified the defendant that he would be recording the conversation, thus the defendant should have expected or at least aware the possibility that other conversations may also be recorded.  I do not agree with such submission.  In my view, just because the plaintiff on previous occasions had notified the defendant, it does not mean that the defendant should expect all her other conversations with the plaintiff would be recorded and one day will be used in court.  Further, unless the plaintiff has told the defendant that he was going to record the conversation, the defendant may treat the conversation as a casual one and would not be on guard as to what she may say to the plaintiff.

(4)   Having listened to the recordings, one cannot help to notice that the plaintiff was always speaking to the defendant in an aggressive if not abusive manner.  While I understand the plaintiff might have felt extremely frustrated because the sales of the Products were not doing well both in Hong Kong and the Mainland, it is not difficult to sense the huge pressure placed on the defendant to say whatever the plaintiff might want to hear while the plaintiff was speaking in such a threatening tone.  It can also be heard that whenever the defendant tried to explain or answer some of the questions raised by the plaintiff, the plaintiff would simply interrupt her and was not interested to listen to what she had to say.

(5)   Most importantly, I find the answers of the defendant consistent throughout those conversations in that she believed she was selling the products legally in Canada although she had expressed concerns of the new regulations which would come into operation in Canada on 1 January 2010 and the status of the Products while the applications made by KYP were still being considered by the authorities during the transition period.   

19. Given the above, I can only accord little weight to the contents of the recordings in this case.

Specific allegations of misrepresentation

20. I now would turn to the specific allegations of fraudulent misrepresentation made by the plaintiff against the defendant. 

21. In my view, the first 3 representations which concerned with the product licence can be dealt with together while the last one dealing with the financial status KYP can be deal with separately.

Product licence

22. For the first representation, namely, whether KYP was entitled to sell and market its products according to the governing laws and regulations of Canada, it is the plaintiff’s case that it was a false representation as evidenced by 4 separate telephone recordings made in March 2007 when the defendant either admitted or stated that KYP did not have the requisite licences to sell the Products in Canada.

23. In a telephone conversation on 22 March 2007, which was recorded by the plaintiff without the knowledge of the defendant, the defendant said that KYP was selling its products “stealthily” (「偷偷地賣」).  Then, in 3 recorded telephone conversations which allegedly took place on 23 March 2007, the defendant admitted that the Products were being sold and marketed in a “small scale or low profile” manner and that KYP did not have the requisite licences to sell and/or market the Products.  Mr Chung, acting for the plaintiff, submits that what the defendant said in those telephone conversations effectively amounting to an admission that the Products could not be sold and marketed in Canada legally at that time and therefore a fraudulent misrepresentation must have been made to induce the plaintiff to enter the Agreement.   

24. I do not agree.  I find the defendant’s explanations on this matter when she gave evidence convincing and consistent with the contemporaneous documents produced by her in this case.  I accept her evidence on this matter without reservation. 

25. It is the defendant’s evidence that:-

(1)   The defendant did make applications for licences for the products to the Canadian authorities[1] and those applications covered all the Products agreed to be supplied by KYP to Puregreenx under the Agreement.

(2)   In 2005, the Canadian government implemented the  Natural Health Products Regulations.[2] These regulations required suppliers of health products such as the Products in question to apply for licences in order to continue with the sale of the products.

(3)   The implementation of the regulations however was meant to be a gradual process and the defendant had until 1 January 2010 to comply with the said regulations.

(4)   During the transition period, although it was not illegal to sell the Products in Canada, the defendant felt concerned in selling the Products on a large scale because she was not sure if she would able to obtain the licence eventually and if she was not able to do so, then she had to re-start the applications all over again. 

(5)   During the negotiations process and before the parties entered into the Agreement, the defendant had specifically informed the plaintiff that the Canadian authorities had recently invited suppliers of nutrition products to apply for licences and KYP was in the course of applying for the required licences for the Products.  The defendant told the plaintiff that she did not know when the licences would be approved but rumour had it that for those products which contained herbal substances, which the western world knew very little about, the applications could take longer. According to the defendant, the plaintiff was not particularly concerned about this which is understandable as the Products would be sold in Hong Kong and the Mainland as opposed to Canada.  Otherwise, she said this matter would have been specifically mentioned in the Agreement[3].

26. On the contrary, I find the plaintiff’s evidence on this matter, as in other matters in this case, devoid of substance and lacks in credibility. 

27. First, the plaintiff agreed that the defendant, at all material time, told him that the licence applications had been made but the same have not been granted to KYP yet.  Hence, at the time of signing of the Agreement, the plaintiff must be fully aware of the possibility that such licence might not be granted by the authorities in Canada.  But as an experienced businessman and someone who teaches in entrepreneurship, I find it difficult to believe that he would not have insisted to put this matter in the Agreement if granting of the licence for the Products in Canada was so important to him at the time. 

28. Second, the plaintiff did not believe there was ever a transition period in the licence application process in Canada.  He learned of this information through a business associate in China and a friend who operated a car rental business in Canada.  However, during cross-examination, he admitted that in fact he had never seen the Canadian licensing regulations before and therefore had no knowledge of whether the regulations provided for a transition period or not.  This shows that not only he was quite ignorant of the application procedures but also he did not care much about whether KYP would be able to obtain licences for the Products in Canada or not at the time of entering into the Agreement.  In any event, his belief has been shown to be mistaken in light of the documents disclosed by the defendant. 

29. Third and perhaps the most important point is that the alleged false representations about the legality of selling the Products in Canada were all made a few months after the Agreement was signed.  I simply do not see how such representations, even if true, could operate on the mind of the plaintiff and induced him into entering the Agreement. 

30. For the above reasons, I have no hesitation to find that the plaintiff has failed to establish that the first representation was false or untrue.

31. For the second representation, namely, whether the Canadian authorities had recently invoked a licensing requirement for the sale of health supplements and that KYP was in the process of applying for the relevant and necessary licences for its products, judging from the documents and the correspondence between the defendant and the Department of Health in Canada, it is beyond dispute that there was such a requirement and KYP was in the process of applying for the relevant and necessary licences for the Products at the time of making the Agreement.  Mr Chung submits that the defendant had stopped following up with the application process since or around January 2005 while represented to the plaintiff in 2007 that the application was still in the process of applying.  He further submits that the defendant knew and/or believed it to be false that she was in the “process” of applying for the necessary licences.

32. I have no difficulty in rejecting such submissions for the following reasons:

(1)   the documents reveal that the defendant had first submitted the applications on 29 December 2004[4] and she had provided extra information to support the application in January 2005[5].  It was not until September/October 2008 that the defendant received the fax letters from the Natural Health Product Directorate informing her that the applications were deficient[6].  

(2)   Hence, at the time when the defendant made the alleged representation to the plaintiff in 2007, the applications were still in the process of being considered by the Canadian health authority and therefore, strictly speaking, were still in the “process”.  I accept the defendant’s evidence that she had done everything she could at the time and there was nothing else she could have done to speed up the process of the applications.  I further accept that she did make a few phone calls to follow-up with the matter but it is clear that the ball was firmly in the court of the health authority and not with her.

(3)   Whether the defendant stopped following up with the application after receiving the letters in 2008 is irrelevant to the issue in this case.  This is because the defendant, as a shareholder, had no duty to do anything further.  By the time when she received the letters in September/October 2008, she had already resigned as a director of Puregreenx for a long time and moved on from the business partnership to her teaching job in China.  In my view, the most significant matter is that in November 2006 when the parties entered into the Agreement, KYP was still in the process of applying for the relevant licences for the Products.

33. For the third representation, namely, the Canadian authority had put in place a transition period whereby products pending the application process could continue to be sold on the market and that the defendant was confident that the said application would be granted and further assured the plaintiff that the application would be granted sooner rather than later, the plaintiff’s case is that there was no transition period and that the defendant could in no way be confident that the licenses would be granted as indicated by the reply letters by the Canadian health authority about the deficient nature of the products.

34. During the trial, it was revealed that there was actually a transition period and it applies to the Products.  Mr Chung tried to argue that the Products were labelled as “normal food” and not “natural health food product” and therefore was not protected by the transition period.  With respect, that must be wrong.  If one looks at the Canadian health authority’s regulations and the applications submitted by the defendant, the Products were well within the definition of “natural health food products” and governed by the regulations.  Given the fact that the plaintiff did not pursue this argument further in his closing submission, I do not need to make any further finding on this.   

35. As regard to the matter of the defendant’s confidence on the process of applying for the licenses, Mr Chung submits the fact that the defendant remained inert and had not provided any further reply to the Canadian health authority’s finding that the Products were deficient in or around September 2008 indicates that the defendant knew and/or believed that the Canadian authority would not have granted the application at the time when she made the representation to the plaintiff.  With respect, I find the logic of this submission rather difficult to follow.  From the evidence, it is clear that the letters of rejection from the authority were received in September and October 2008.  However, according to the plaintiff’s case, the representations were made priorto the signing of the Agreement dated 1 November 2006 or during the recorded telephone conversations in early 2007.  I simply do not see how the inaction of the defendant 2 years after signing of the Agreement or making the alleged representation in the telephone conversations could be construed as a misrepresentation on her part.   

36. As said, I accept the defendant’s evidence that she had applied for the licences and had done everything she could by following the procedures set out in the regulations by the Canadian authority. Since she had only received the final “rejection” letters from the authority in September and October 2008, at the time she made the alleged representations back in 2006 or 2007, she would have no knowledge that the applications would be considered as deficient by the authority.  She had, in my judgment, at the time of making the Agreement, every reason to believe that the applications would be approved by the authority and the approval would be granted sooner rather than later.  Thus, I would reject the plaintiff’s argument insofar as he relies on the third representation as a fraudulent misrepresentation.

KYP’s financial status

37. For the fourth representation, the plaintiff alleges that, at the material time of the Agreement, KYP was on the verge of breaking even financially and the annual report which would be prepared in due course would reveal that KYP had broken even.  There is a significant difference in the evidence given by the parties on this matter.

38. It is the plaintiff’s case that the defendant made this representation in order to induce the plaintiff into signing the Agreement.  The plaintiff says that by looking at the financial statements, KYP was in fact in debt and was nowhere near to breaking even.  The defendant, being the only director of KYP, was fully aware of the situation yet she made the representation to the plaintiff by “indicating” to him that the company was on the verge of breaking even.

39. It is the defendant’s case that she had never told the plaintiff that KYP was going to break even or make a profit.  The defendant in her evidence stated that she had not held such an optimistic prediction of the company.  She told the plaintiff that she was only operating on a small scale and certainly never guaranteed that KYP would break even.  Further, Mr Sunny Chan, counsel for the defendant, submits that even if the representation was found to be made, properly interpreted, the representation is a statement to the defendant’s intention to the future as opposed to any fact or law.  Absent of any proof of dishonesty, statement as to future intention does not amount to misrepresentation.  In any event, Mr Chan submits that the fact implied in the representation that KYP would break even in the future was that KYP has not broken even yet.  As a fact, that must be true.

40. On a balance of probabilities, I would accept the defendant’s evidence in preference to that of the plaintiff’s on this matter for the following reasons:-

(1)   I find it hard to believe that the plaintiff, being an experienced businessman and someone who taught students to set up new businesses, would be so naïve as to merely believe in what the defendant had told him regarding the financial status of KYP.  If such representation was in fact made by the defendant (which I do not believe the defendant did), I see no reason why the plaintiff would not wait for examining the financial reports before signing the Agreement if the financial status of KYP was so important to him.  From the evidence, there is nothing to indicate that the plaintiff had successfully found a potential client or market to sell the Products to at the time and therefore there was no rush for him to sign the Agreement.

(2)   I accept the submission by Mr Chan that KYP’s financial well-being is an irrelevant consideration when it comes to whether the plaintiff could have been induced into entering the Agreement.  The Agreement is about setting up and defining the role of Puregreenx in Hong Kong. Puregreenx is a totally separate legal entity from KYP.  One is a Hong Kong company and the other one is a Canadian company.  The plaintiff was never a shareholder or director of KYP.  The relationship between KYP and Puregreex is purely one between a supplier and distributor.  In my opinion, the plaintiff would not have reasonably relied on this representation (if it was ever made) and therefore cannot be said to have been induced into the Agreement through this representation.

(3)   I further agree with Mr Chan the plaintiff’s suggestion that he has a financial interest in KYP only predicated upon the plaintiff completing a turnover of HK$3 million within the first 3 years of signing of the Agreement.  However, according to his own evidence, as an experienced businessman, he felt that it was reasonable to predict that KYP would make a profit.  Thus, it is clear that he was not relying on what the defendant might have told him regarding the financial status of KYP but acted according to his own judgement and assessment on the risk and benefit involved.   

41. In the premises, I find the plaintiff has failed to establish the fourth representation had been made by the defendant or, if made, the plaintiff has ever relied on the same.

42. As a result of the above findings, in my judgment, the plaintiff has failed to discharge the burden of proof in establishing any fraudulent misrepresentation against the defendant.

(II)   Breach of Implied Terms

43. There is no dispute that the test to determine whether there exists an implied term is that helpfully laid down by Sakhrani DHCJ in Ko Wang Ming v Hong Kong Forex Investment Ltd HCA 2320/2008 at §91:-  

“for a term to be implied the following conditions (which may overlap) must be satisfied: “(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

44. This is echoed by Lord Hoffman in Attorney-General of Belize v Belize Telecom Ltd [2009] 2 BCLC 148 at p156 at §27:-

“[the conditions laid down in the test] are best regarded, not as a series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so.”

45. The plaintiff has pleaded a number of implied terms of the Agreement in §§13 (a) to (h) of the re-re-amended statement of claim.  They are:-

(a)   Each of the parties to the Agreement, whether at the same time having the role of shareholder or director of the company, or simply being a partner to the business, shall endeavour to act in good faith to each other and for the benefit of the business, the plaintiff and the defendant as a whole;

(b)   The parties to the Agreement shall co-operate to ensure the performance of the parties’ bargain and of the terms of the Agreement;

(c)   The parties to the Agreement shall not do any act or omit to do any act which would prevent the performance of the Agreement;

(d)   The parties to the Agreement shall not do any act or omit to do any act which would prevent or hinder the operation of the business;

(e)   Each of the parties to the Agreement, whether at the same time having the role of shareholder or director of the company, or simply being a partner to the business, shall account to the plaintiff, the defendant, and the business as a whole for any benefit derived by him from transactions concerning the business, or from any use by him of the property, name or business connection of the plaintiff, the defendant, and the business;

(f)   In the event that the business and/or the company is operating at a deficit or in short of cash flow, each of the parties shall within reasonable time further invest to ensure the normal operation of the business and/or the company;

(g)   Each of the parties to the Agreement shall be responsible for the operating expenses of the company in proportion of their actual shareholding in the company; and

(h)   All products marketed and sold by KYP shall comply with all the relevant licensing requirements, and that KYP is entitled to sell and market its products according to the governing laws and regulations. 

46. The core issue is whether the implied term must be necessaryin orderto give business efficacy to the Agreement.

47. Mr Chung submits that since the Agreement was not a very detailed and professional agreement, terms had to be implied in order to give business efficacy.  

48. I do not agree.  I do not think it is right to imply terms on such ground as it will be against the very reason of having the written contract in the first place.  Furthermore, if the implied terms claimed by the plaintiff are so important, I see no reason that why they should not be incorporated as part of the Agreement, whether in its original form or the subsequent amended version.  After all, the plaintiff is someone who taught students entrepreneurship and drafting a basic contract to include all the relevant terms to give business efficacy must be one of the skills required.

49. The relevant clauses the defendant alleged to have been breached are terms (f), (g) and (h).  

50. For terms (f) and (g), they require the parties to inject capital into the company under different circumstances.  I accept Mr Chan’s submission that it is not reasonable or equitable to imply such terms as it would be against the ordinary principles of company law to force a shareholder to inject extra capital to the company in the event of cash-flow shortage in the absence of any shareholders’ agreement.  I further accept Mr Chan’s submission the terms are neither necessary for the performance of the Agreement nor is it so obvious that it would go without saying.  But the more important point being that the Agreement itself contains nothing resembles to the requirement that a shareholder will have to inject capital into the company as and when it is short of cash. 

51. For (g), it is clear from the evidence transpired during the trial that the parties had made arrangements for the contribution of the operating expenses.  This is supported by the documents showing the transfer of RMB$75,000 by the defendant[7]. Although the plaintiff did not sign on the first page of the document, the plaintiff did acknowledge the defendant’s contributions by signing on the receipt.  Hence, in my view, when reading the 2 documents together, the irresistible inference is that the parties had reached some sort of agreement on how to share the operating expenses.   Hence, it will not be right for the court to imply a term that may directly contradict to the parties’ expressed intention.

52. For term (h), it again concerns the issue of whether KYP was entitled to sell and market its products legally.  It is submitted by Mr Chung, counsel for the plaintiff, that the plaintiff entered into the Agreement with the defendant because of the representation that the company was already selling and marketing its products in Canada and this “goes without saying” that KYP was selling its products legally and had the required licences.  I disagree with such submission.  This matter has been dealt with above under the discussion of fraudulent misrepresentation.  I do not wish to repeat them here.

53. In my judgment, this term does not meet the test laid down in Ko Wang Ming, supra and in particular it was not necessary in order to give business efficacy to the Agreement.  I agree with Mr Chan that whether the Products are licensed for sale in Canada will have no bearing of whether they can be sold in Hong Kong and the Mainland.  Under the Agreement, it is not a requirement that the Products have to obtain their licences in Canada first before they can be sold in the Hong Kong and the Mainland market. Thus, by the reasons mentioned above, I cannot find the need to imply term (h) into the Agreement.

54. In conclusion, I come to the conclusion that none of the implied terms are reasonable or necessary for the performance of the Agreement.  Hence, the claim for breach of implied terms must fail as the court will not imply new terms into the already clear Agreement made by the parties.

Misappropriation of company samples

55. The issue here is whether the defendant had misappropriated the company samples which were supposed to be mailed to Puregreenx Hong Kong’s post-box at the General Post Office.  The samples was posted and picked up by the defendant at her own personal address at Kowloon East Post Office.

56. It is the plaintiff’s case that the defendant had a duty arising from the Agreement that she should not misappropriate assets or properties arising from the joint investment under the Agreement.  Because of the misappropriation of the samples, the plaintiff claims that he could not carry out the necessary licensing requirements in order to move on towards the manufacturing and selling stage. 

57. I do not agree.

58. In her evidence, the defendant has explained the process of applying for the licences locally and the attestation procedures.  One of the first steps is to submit samples of the Products to a laboratory, in this case China Inspection Company Limited for tests.  The defendant sent in a sample to the laboratory for such a purpose.  The defendant explained that this was because at the time, she was not in Hong Kong and she wished the plaintiff would send in the samples to the laboratory for tests.  However, according to the defendant, the plaintiff was unwilling to do so and she had to come back to Hong Kong to deal with the matter herself.  Under such circumstances, the samples were sent to her address instead of Puregreenx’s address.  However, it is clear from the invoices that the defendant did so on behalf of Puregreenx and not for herself.   

59. I agree with Mr Chan, acting for the defendant, that since the defendant was merely a shareholder at that time, she owed no fiduciary duty to Puregreenx.  Further, I accept the defendant’s evidence that she was merely trying help Puregreenx to submit the samples to the laboratory for testing when the plaintiff refused to do so. There was no intention of misappropriation and no breach of any implied term.

(III)  Quantum

60. Since I have dismissed the plaintiff’s claim on both grounds, I do not need to deal with the issue of quantum in this case.

61. However, I would like to add that, in my view, there is absolutely no basis for the plaintiff to make a claim of HK$696,850 based on the alleged ground that as a shareholder she has an obligation to contribute to the loss of Puregreenx in accordance with the percentage of shareholding she has in the company.   

CONCLUSION

62. In conclusion, I am of the view that the plaintiff has failed to establish any of the allegations of fraudulent misrepresentation or breach of the implied terms of the Agreement in this case and therefore his claim herein must be dismissed with costs.

63. Mr Chan, acting for the defendant, suggested the possibility of imposing indemnity costs if I find the ground for fraudulent misrepresentation was unsupported by cogent evidence and may have wasted the court’s time: See Jeremy Paul Egerton Hobbins v Royal Skandia Life Assurance Limited and Clearwater International Limited, HCCL 15/2010, unreported (Reyes J;  6 January 2012).

64. Mr Chan made this submission on the basis that the threshold of fraudulent misrepresentation is very high and the plaintiff had failed to provide “cogent evidential basis” for such allegations.  Furthermore, the claims of fraudulent misrepresentation were only added to the re-re-amended statement of claim less than 2 weeks before the commencement of the trial (on 12 August 2014) and have been maintained by the plaintiff throughout the trial.

65. In the particular circumstances of this case, I do not think it is appropriate to impose indemnity costs because the plaintiff did provide some evidence, albeit not very strong one, to support the claim for fraudulent misrepresentation.  I therefore will make an order nisi that the plaintiff do pay the costs of the defendant in this action, including the costs wasted as a result of the late lodging of the opening submission of the case on the first day of the trial of which I had already summary assessed.  Such costs to be paid on a party and party basis, to be taxed if not agreed with certificate for counsel.  The order nisi will become absolute unless the parties apply within 14 days from the date of this judgment to vary the same.