TQM CENTRE LTD. v. NG MAN FAI

HCA 9808/94

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9808 OF 1994

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JUDGMENT ON ASSESSMENT OF DAMAGES

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Background

1. The Plaintiff was at the material time a company engaged in the business of providing management and consultancy services, in particular, on obtaining "ISO-9000" status accreditation. It commenced business in December 1992 and ceased business on 24 September 1993.

2. The Defendant together with a Mr. Tong Wai Kwok Aaron ("Mr. Tong") and a Madam Ip Yim Ching ("Madam Ip") were at all material times the shareholders and directors of the Plaintiff. Madam Ip was the nominee of her husband, Mr. Edmond Fong ("Mr. Fong"). The Defendant was appointed the managing director and was charged with the duties of soliciting business for the Plaintiff, following up on the clients and providing the necessary services to the clients. He was paid a monthly salary of $30,000.

3. Sometime in June 1993, the relationship between the Defendant and the other directors and shareholders of the Plaintiff deteriorated. The Defendant subsequently set up 2 companies called "TQM International Company" and "TQM International Company Limited". It is apparent that the names of these companies bear close resemblance to the name of the Plaintiff.

4. By this action which was commenced on 1.10.1994, the Plaintiff claims against the Defendant for breach of fiduciary duties as a director and/or passing off by :

(a) setting up his companies in competition with the Plaintiff,

(b) using assets of and information derived from his work with the Plaintiff for his own companies,

(c) failing to exercise reasonable care in relation to the business of the Plaintiff, and

(d) making misrepresentations to the clients of the Plaintiff on the relationship between the Plaintiff and his own companies.

5. Upon non-compliance with an unless order for specific discovery, the Defendant's Defence and Counterclaim was struck out. Interlocutory Judgment was entered on 3.4.1996 by Master O'Donnell for orders for delivery up of the infringing articles and the Plaintiff's properties as well as orders for accounts to be taken. On 10.5.1996, Mr. Justice Leonard granted an order for injunction restraining the Defendant from passing off business other than the Plaintiff's business as the Plaintiff's business by using inter alia, the names "TQM International" and "TQM International Limited" together with damages to be assessed and costs of the action.

The Plaintiff's Claim in the Assessment

6. In this assessment, the Plaintiff seeks to recover damages for breach of fiduciary duties as director and/or for misrepresentation leading to passing off. Four heads of loss and damages were initially sought and they were :

(a) Loss of existing business,

(b) Loss of prospective business,

(c) Value of the Plaintiff's properties which were wrongfully retained by the Defendant, and

(d) Loss of commission.

7. Neither the claim for damages representing the value of the Plaintiff's properties nor the alleged wrongful act of retaining the Plaintiff's properties was pleaded in the Statement of Claims. After this was pointed out in the course of counsel's Opening, the Plaintiff elected not to proceed further with this head of damages.

The Evidence

8. Only Mr. Tong gave evidence for the Plaintiff. He testified that as the Defendant was required to work full time for the Plaintiff, he was the only director receiving a salary from the Plaintiff. In June 1993, Mr. Tong purchased part of the shareholding of Madam Ip, as a result of which his shareholding in the Plaintiff increased to 60% with the remaining 30% and 10% being taken up by the Defendant and Madam Ip. He then resigned from his employment and also worked full time for the Plaintiff.

9. In the course of contacting the clients, Mr. Tong came to learn that the Defendant had set up his own companies in competition with the Plaintiff. The Defendant had also been diverting clients and business from the Plaintiff to his companies by, inter alia, representing that they were related to or the same as the Plaintiff. Mr. Tong also came to learn of complaints made by the Plaintiff's clients on the services rendered through the Defendant. The other directors of the Plaintiff were unable to have access to the Plaintiff's office，hence its clients and related business information as the Defendant had kept the office keys，the business records and documents of the Plaintiff.

10. According to Mr. Tong, as a result of the refusal of the Defendant to co-operate with the other directors, the Plaintiff's business was effectively brought to a standstill such that it had to cease business on 24 September 1993.

11. The Defendant did not formally resign from his directorship. At the shareholder's meeting on 18.2.1994, his directorship was terminated by the shareholders with immediate effect.

Loss of Existing Business

12. This head involves 3 of the Plaintiff's clients, Lik Hang Electronics Company Limited ("Lik Hang"), Wealthy Regent Construction Limited ("Wealthy Regent") and Wah Wei Technical Services Limited ("Wah Wei").

(1) Lik Hang

13. In the case of Lik Hang, it was a client referred to the Plaintiff by a common friend of Mr. Tong and the Defendant. The Defendant, on behalf of the Plaintiff, successfully negotiated a consultancy services contract with it and the same was dated 3.8.1993. Shortly after that, this contract was cancelled and a new contract in identical terms was signed between Lik Hang and the Defendant's company, TQM International Company, also dated 3.8.l993. Mr. Tong's evidence is that a Mr. Lee of Lik Hang told him that the Defendant requested for the new contract to be signed on the pretext that the original contract with the Plaintiff contained typographical errors. Mr. Lee of Lik Hang was not called to give evidence. This part of Mr. Tong's evidence must therefore be hearsay and inadmissible. However, even without this piece of evidence, I am prepared to infer that the Defendant had diverted this client from the Plaintiff. This must be the only inference to be drawn from the objective facts of (i) the Defendant was the only link with Lik Hang, (ii) the cancellation of the contract with the Plaintiff shortly after its execution, (iii) the execution of a new contract with the Defendant's company, (iv) the 2 contracts being of the same date and in identical terms, and (v) the names and logos of the Plaintiff and the Defendant's company bearing such close resemblance.

14. The value of this contract with Lik Hang is in the amount of $380,000 and the Plaintiff stands to recover the same.

(2) Wealthy Regent and Wah Wei

15. These 2 clients had entered into service contracts with the Plaintiff, each at a fee of $180,000, in early 1993. The Plaintiff was unable to produce the written contracts as they were kept by the Defendant. These contracts were included in the order for specific discovery, which the Defendant had failed to comply, leading to judgment being entered against him. Interim payments in the respective amounts of $90,000 and $50,000 had been paid and received by the Plaintiff from Wealthy Regent and Wah Wei.

16. Mr. Tong's evidence is that the Plaintiff was prevented from continuing with its obligations under the contracts as a result of the Defendant refusing to discharge his duties and/or to hand over the contracts, the Plaintiff's reports, the client's data and other relevant documents. Hence, by reason of the Defendant's breach of duties as a director, the Plaintiff was deprived of the opportunity to earn the balance of the fees under the 2 contracts, being the respective sums of $90,000 and $130,000.

17. I accept that the Defendant was obliged to perform his duties as director until he resigned or was removed as a director. He must continue to provide, on behalf of the Plaintiff, services to the 2 clients under the contracts and also to account to the Plaintiff for the payments or fees received under the contracts. It is plain from the evidence that the Defendant has failed to do so such that he is answerable to the Plaintiff for the loss of income under the contracts. Accordingly, the Plaintiff is entitled to recover from the Defendant the sums of $90,000 and $130,000.

18. The total amount to be recovered under this head of damages is $600,000 (i.e.$380,000 + $90,000 + $130,000).

Loss of Prospective Business

19. The Plaintiff's case for this head of claim is that the Defendant was charged with the responsibilities of marketing and promoting the Plaintiff's business as well as the day-to-day management of the Plaintiff's business. Instead of actively soliciting business for the Plaintiff and providing services to the clients on behalf of the Plaintiff, the Defendant had engaged in activities in competition with the Plaintiff. Further, the Defendant had refused to return to the Plaintiff information and data of the Plaintiff's clients and had further made use of the same for his own benefits. It is Mr. Tong's evidence that because the Plaintiff could not gain access to its office and its records and clients' data, the Plaintiff's business came to a halt and had to cease in September 1993.

20. In quantifying the loss, the Plaintiff refers to the business volume generated since it commenced business in December 1992 until June 1993 when the Defendant failed to discharge his duties as director. According to Mr. Tong, the value of the business generated in the 7 months was $960,000. Against that figure, he projected that the Plaintiff would be able to generate $384,000 within the 2.8 months' period between July and 24 September 1993 when the Plaintiff ceased business. The Plaintiff therefore claims this amount under this head.

21. In the course of Mr. Ko's final submissions, I raised queries as to the remoteness of this head of loss. My principal concern was the probabilities or chances of the Plaintiff getting the further or prospective business, which is said to be lost as a result of the Defendant's breaches of duties.

22. In the case of Kishimoto Sangyo Co. Ltd. v. Oba [1996] 2HKC 260, the Court of Appeal in assessing the damages payable by an employee for breaches of his duty of fidelity, held that the employer must show a casual link between the acts complained of and the loss allegedly suffered. In that case, the trial judge found that when the employee left the employment, the business project upon which the Plaintiff's claim for damages was based, was only in an embryonic stage and was not a maturing business opportunity. He also found that one of the principal reasons for the employer failing to secure the profitable contracts was because of the employee's departure and without him, the Plaintiff simply lacked the expertise and skill to develop the business. The Court of Appeal held that there was no link between the employer's alleged loss of prospective business and the employee's breaches of duty and awarded nominal damages only.

23. Mr. Tong's evidence is that in 1992 and 1993, many businesses and companies were eager to be accredited "ISO-9000" or "ISO-9001" status. The provision of consultancy services for obtaining such accreditation was therefore a blooming business. Mr. Ko therefore submitted that the Plaintiff stood a good chance of getting the same business volume as it had before if it were not for the wrongful acts of the Defendant.

24. On the other hand, the evidence shows that the Plaintiff was a small consultancy business. It had only operated for 7 months when the Defendant began to be unco-operative. It relied on "cold calls", advertisements and seminars, conducted principally by the Defendant, to solicit business. Further, from the evidence of Mr. Tong in answer to questions I raised, it does not appear that any of the shareholders and directors of the Plaintiff, including Mr. Fong, was professionally qualified in business and service management and quality control. They apparently derived their knowledge or experience of "ISO-9000" or "ISO-9001" status accreditation from working with their respective employers who had obtained such status, presumably with the aids of consultants. Since the Plaintiff commenced business, the Defendant was the one responsible for providing services to the clients. It is however not clear from the evidence before me as to what the Plaintiff and/or the Defendant had to offer or could provide to enable the clients to obtain the accreditation. I therefore entertain doubts as to whether the Plaintiff's business would flourish or could be sustained independent of the Defendant's breaches and after the Defendant ceased to be its director.

25. Mr. Ko asked me to distinguish the case of Kishimoto on the facts. He submitted that the evidence here is neutral as to whether the Plaintiff could survive with the departure of the Defendant, had he not refused to return the Plaintiff's records and client data. He also pointed out that there is no evidence that other directors or people of the Plaintiff could not undertake the work of the Defendant in soliciting business and establishing client contacts.

26. I accept that Mr. Tong did mention in his evidence that from time to time, the Defendant had discussed with him and Mr. Fong problems he encountered when serving and advising the Plaintiff's clients. I also accept that the evidence does not establish that the Defendant possessed much greater skill and expertise in obtaining "ISO-9000" status accreditation than the other directors, although he was previously the quality manager of a public company which was the first electronic business in Hong Kong to be accredited with the status. In this regard, the facts of this case do differ from that in Kishimoto.

27. Despite that, I remain of the view that the evidence in support of this head is too tenuous and remote. There is nothing to show that the Plaintiff was having or was going to have a steady and constant flow of clients and business at the time the Defendant committed the breaches. It is true that the Plaintiff had generated $960,000 volume of business in the first 7 months of its business. It may also be that "ISO-9000" accreditation was a popular quest in 1992 and 1993 such that the provision of related consultancy services was a blooming business. In the absence of evidence on the reputation of the Plaintiff, the competition in the trade or lack of it and the business opportunities available to the Plaintiff, it is speculative to say that the Plaintiff had suffered a loss of prospective business on the basis that it would probably make the same amount of business as before. This is particularly so when one considers the Plaintiff had only started business for 7 months and the evidence of Mr. Tong suggests that the Plaintiff was receiving complaints from its clients on the quality of services provided. There is also no indication of any business deal or contract being in the course of negotiation or being developed when the Defendant committed the breaches complained of. Both Mr. Tong and Mr. Ko had urged upon me the fact that, because the Defendant had refused to make available to the Plaintiff the relevant documents and information, the Plaintiff has difficulties in adducing the precise evidence in support of the loss under this head. While I appreciate the difficulties, I cannot overlook the fact that the burden of proving substantial damages falls on the Plaintiff. I therefore make no award under this head.

28. Even if I were to be satisfied that the Plaintiff had proved this head of loss, the value of the contract with Lik Hang should be deducted from the amount sought. This is because the contract date was after June 1993 when the Defendant began to be in breach of his duties. As such, the loss of this contract should form part of the prospective income, which the Plaintiff lost as a result of the Defendant's breach. To allow the Plaintiff another $384,000 under this head on top of the value of the Lik Hang contract, being $380,000, will be allowing the Plaintiff to be compensated twice for any loss it stood to lose in the 2 odd months between June and September when it ceased business.

Loss of Commission

29. This is in effect a claim for the secret profits derived by the Defendant using the Plaintiff's information. Mr. Tong's evidence is that in connection with the Lik Hang contract, the Defendant had, on behalf of Lik Hang, ordered from one Power Master Limited certain computer systems and services. As a result, the Defendant earned a commission in the sum of $48,346. This was shown on the delivery note issued by Power Master Limited.

30. I am satisfied that the Defendant ought to account to the Plaintiff this amount of commission and the same is recoverable by the Plaintiff.

Deduction

31. The Plaintiff fairly and rightly accepts that in quantifying its loss and damages, account has to be given for the salary payable to the Defendant, but which had not been paid, for the months of June to September 1993. The 4 months' salaries come up to $120,000 (i.e. $30,000 x 4). This should be deducted from the total award of damages.

Interest

32. As interest was not claimed in the Statement of Claim nor ordered by the Judgment of Master O'Donnell nor by the Order of Findlay J. directing for damages to be assessed, no order for interest on the award will be granted for the period before the date of this judgment.

Conclusion

33. The total amount to be awarded to the Plaintiff by way of damages herein is the amount of $528,346, made up as follows :

Loss of existing business	$600,000
Loss of commission	$ 48,346	$648,346
Less :
Salaries payable to the Defendant		$120,000
Total award :		$528,346

34. Interest at judgment rate will accrue on the award from the date of this judgment until full payment. I also make an order nisi that the Defendant pays the Plaintiff the costs of this assessment to be taxed. The order nisi to be made absolute at the expiration of 14 days after the handing down of this judgment.