XCHRX DIETER HEINZ STEIMECKE AND OTHERS v. ARMIDALE LTD. AND OTHERS

HCA 11299/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11299 OF 1997

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J U D G M E N T

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1. This comes before me as a master's appeal. The Plaintiffs obtained leave to serve out of the jurisdiction under Order 11 ex parte and the 3rd Defendant, Jenoptik AG, a well known German company, had made an application to Master Lok that that leave should be set aside. The Master dismissed it, I am not told why. No reason was given which is a great pity.

2. The background to this matter appears somewhat complex. The Plaintiffs issued a writ on 24 October 1998 against the four Defendants and they claimed basically breaches of contract. Except for the 3rd Defendant who is seeking to set aside this leave, their claim against them falls under two heads - which is probably the same matter looked at in a different light - of a procurement to bring about a breach of contract, or a conspiracy to damage the Plaintiffs by bringing about this breach of contract.

3. Mr Steimecke, the 1st Plaintiff, provided for some time a consultancy agreement for a company called Armidale Limited, he did this through a company vehicle as well and matters were continuing by virtue of an agreement that had been entered into between the Plaintiffs and Armidale for consultancy services which had been running for some years and provided for a termination on 12-months' notice. So far there is no difficulty. However, what then happened, it may be for financial problems, I do not know, but Mr Verheul and some employees of a Group called MBO, which is a group of subsidiary companies under the umbrella of Armidale and the structure, called the Dransfelt Investment Structure, is set out helpfully (which the parties have provided) on a company structure appended to some submissions which sets out the matter in graphic form.

4. Mr Verheul wanted to acquire the shares which had been held by Darwen Consultants Limited in a company called Dransfeld Investment Limited, which was the sole shareholder of Armidale Limited (a Hong Kong company). And Mr Verheul, together with some employees of MBO, entered into a very strange agreement in January 1994 which was drafted by a layman. The only clear thing I can find in this case is the last sentence which says :-

"While this agreement lacks professional Legal Counsel input, it should nevertheless be considered enforceable in Hong Kong and/or German courts."

From the agreement (at page 5 of the Bundle) it can be seen that Darwen was selling to Mr Verheul the shares in exchange, it says, "of keeping the benefit of Armidale Limited service contract with Dieter Steimecke to be switched to Dask Management Limited, in full effect for 24 months", i.e. from March 1994 to March 1996. As I have said, the actual service agreement was capable of being brought to an end on 12-months' notice.

5. There is no doubt at all that looked at in isolation, this clause varied the original agreement by continuing the Armidale service contract at least until March 1, 1996. In so far as that was concerned, at first blush it did not appear to be enforceable because the promise given to secure that was that within the existing service contract for a period of 24 months, no matter what, Armidale shall provide at no costs office space and shall keep in effect the agreement for 24 months. As I have said, it is odd consideration, however, it had been pointed out to me, and I would accept, by Mr Yuen that courts should strain to ensure that agreements, when they are performed or a substantial part performed, are enforced by the courts. What happened was that the shares were sold and the office space, as far as I can gather, was provided, and the agreement continued.

6. The real problem in this case is caused by another clause which has the word "thereafter", which must mean "from the 1st March 1996 a new no cancelable consultant contract shall be entered into whereby Armidale shall pay 1/2% of the turnover monthly". That might have been some consideration, I find it a very difficult point, quite frankly, to say whether that is additional consideration or not. In my judgment, on any view it is unenforceable. It is for a period of time with no limit. If it means anything at all, it is merely declaratory of the hope that a new consultant agreement should be entered into. Why this becomes important is because the Plaintiffs have decided - presumably because they realized Jenoptik probably have more money than the other Defendants - is to try to get Jenoptik in to make them liable.

7. Jenoptik of course is not party to this agreement. The case for the Plaintiffs would be against Armidale, if they considered Armidale broke the contract, and they have sued Armidale and Verheul and Dransfeld for breach of contract, the defence being put forward, it seems, at first blush, a fairly good defence. But it is not for me to comment upon it, but that portion of the agreement is unenforceable.

8. As I said it is an important matter because the so-called cause of action by the Plaintiffs against Jenoptik was brought about in this way : Jenoptik approached Armidale sometime in 1994 (as is clear from the correspondence), they were eager to acquire what was called the MBO Group, which is a wholly owned subsidiary group of Armidale, Armidale being a holding or merely the machinery by which the profit elements of MBO are taken into Armidale.

9. Jenoptik had their eyes on this group and wished to acquire them. There is no doubt at all that those in authority in Jenoptik, and all the lawyers, who formulated decisions at this stage must have seen this so-called agreement of January 1994. There was also produced, and forming part of the documents which were attached to the company documents and therefore be seen by a newcomer, a document dated 17 February, which was the shareholder meeting of Armidale where Mr Steimecke was present and Mr Verheul was in the chair. A resolution was passed and it was resolved that "the attached agreement [the agreement which I have mentioned already plus another agreement which is not necessarily relevant for these purposes, concerning the integrated subsidiary] would form a part of the company memorandum and that the future shareholders and/or directors cannot vote or cancel these agreements or change the companies and its subsidiaries business structure without the prior written consent of Peter Schmidt ....and Dieter Steimecke..."

10. On an Order 11 application, I assume, against the 3rd Defendant, that it had full knowledge of the agreement and also the company resolution. Again, what that actually mean is very debatable. As I said, it appears to me an unenforceable contract, the second part of it being unenforceable as being uncertain, and the resolution being to keep in being this uncertain agreement.

11. What then transpires was a letter written by Armidale dismissing the services of Mr Steimecke in December 1994 which reads :

"RE: TERMINATION OF EMPLOYMENT CONTRACT OF MANAGING DIRECTOR

We regret to inform you that the agreement between Armidale Limited and Group of Companies of Hong Kong hereby called MBO of the one part and Mr. Dieter Steimecke commenced form 1st October 1990 will be terminated effective 1st January 1996.

According to the terms and conditions of the employment contract, we hereby give you one year written notice of the termination."

This would be in accordance with the provisions of that contract which permitted 12 months written notice. However, in my judgment, Armidale was most probably in breach of the contract because the written agreement had extended the period up to March 1996.

12. Again it is unnecessary to come to any considered opinion on this aspect of the case because the cause of action which the Plaintiffs alleged here is not in relation to the first part of that unusually written document, but is in relation to the second part. Jenoptik, by an agreement dated 5th August 1994, which is also exhibited and found in the Bundle at page 149 (a translation from German), acquired the shareholding (again I do not go through the details of the share transactions) but what in fact happened was that Jenoptik acquired the shareholdings of the subsidiaries. The subsidiaries clearly, as I said in argument, was the lifeblood of Armidale and provided the profit element (maybe sometimes they were not as profitable but the potential profit element) to Armidale. What is said here by the Plaintiffs, putting it in a nutshell, is simply this. They say "we will ignore that potential breach of contract in 1994 when the letter was written to bring about an end to the agreement three months earlier, we say there has been a breach of the agreement by Armidale not to renew this service contract for some period." - no one knows what the period is - "and that the decision not to grant that (in other words the breach of contract) was procured by the actions of Jenoptik when they acquired the MBO subsidiaries and were in breach of the resolution which says 'cannot change companies and/or its subsidies business structure without the previous written consent'". And what they say is that they say they have a good cause of action against Jenoptik because Jenoptik acquired the shares.

13. Mr Carolan submits that it does not matter what the position was with the first part of the agreement because under their agreement with Armidale, they were providing at any rate 1/2% of the profit that would be paid, and the decision not to renew the agreement was a decision of Armidale, not their decision and they did not procure anything. All they did was legally buy shares at arms-length. There is no suggestion here of fraud or a practice which is close to fraud. There is nothing alleged here. It is clearly an arms-length transaction between Jenoptik and Armidale whereby Jenoptik acquired these shares, albeit with knowledge of this earlier agreement.

14. I can find no evidence of procurement to start with, which it is said that the court should imply from the actions. I find the second part of this agreement clearly unenforceable. It provides no period of time. Whilst courts would strain to ensure that this first part of the contract, up to March 1996, is preserved, Jenoptik had done nothing to affect that. Indeed, they ensured that Armidale would perform its contractual obligation by building into its sale price this extra 1/2%. I therefore can find the exact opposite : I think Jenoptik have encouraged Armidale to continue its contractual obligation up to March 1996. As I said I can find no obligation thereafter, but even were I in some way to assume that there was some obligation and that this paragraph must mean something, in other words, it must mean a new consultant contract for some reasonable period whatever that could possibly be, I can find nothing which Jenoptik have done to cause it to be broken. Indeed the factual background of this case is exactly to the contrary because it was Armidale which brought the service contract to an end. I can find nothing to say that Jenoptik procured that. Indeed, it is not alleged that Jenoptik procured the sending of the letter. The Plaintiffs should point to something which would demonstrate that Jenoptik procured Armidale into not entering into this new agreement even assuming, as I said, that there was a legal obligation. I do not think, speaking for myself, there was a legal obligation. It is not necessary to decide that because there is litigation going on and whatever I say on an Order 11 application does not bind the court hereafter.

15. The matter was originally based on Order 11, rule 1(c) relating to a contractual relationship, and Mr Yuen has accepted that that does not apply. It really is whether or not it falls under Order 11, rule 1(f), namely, whether there is a tort. The tort here is said to be the conspiracy or the procurement of a breach of contract. The Plaintiffs have got to show a good arguable case. In my judgment, they have showed nothing at all. They showed some highly suspicious matters perhaps; they have showed some merit in the sense that Jenoptik were able to acquire these subsidiaries and no doubt turned them into profitable vehicles, but I can find nothing which they have done which can in any way be categorized as a procurement. As I have said I have substantial doubt whether indeed the second part of the agreement is enforceable at any rate.

16. In so far as the point which Mr Yuen seeks to argue that in some way the Defendants, with knowledge of the company resolution, caused them to procure a breach by virtue of the fact that that is what it said in the resolution, in my judgment, I confess I do not understand that submission. It seems to me that even with knowledge of the resolution which they must have had, by virtue of it being a company document, the obligation was on Armidale, I cannot see that in that way they procured this breach. The position, however, might have been different, for example if evidence had been led that the relationship between Armidale and Jenoptik was flawed by fraud or improper means such as to put the Plaintiffs at a disadvantage. It is not necessary to examine the well known authorities on this aspect, but there has got to be clear evidence. I have considered the point. It is not pleaded, because in my judgment there is no evidence. The only claim here is a claim in tort arising from the procurement of a breach of contract. It being accepted in that plea that the relationship between Jenoptik and Armidale was indeed an arms-length transaction and that valuable consideration was given for the sale of the Armidale shares in MBO to Jenoptik. In my judgment, therefore, I consider the Master was wrong in not setting aside leave.

17. These matters under Order 11 are not easy. Jenoptik, a German company, are entitled to come to the court and make the Plaintiffs establish their case to demonstrate to the court that they do indeed have a good arguable case. Foreign corporations should only be brought into litigation in Hong Kong when it is clear that they are a necessary party, or a cause of action as specified in the rules is made out. In my judgment, it is not made out. I therefore would set aside the leave which was granted.