KAM LAN KOON v. ACE PHARMACEUTICAL (HK) LTD AND ANOTHER

DCCJ1492/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1492 OF 2012

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JUDGMENT

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1.  This is a claim by Kam Lan Koon (“the plaintiff”) against Ace Pharmaceutical (HK) Ltd (“D1”) and Lau Man Wai, Joseph (“D2”). The claim against D1 is for breach of duties in its capacity as an agent of the plaintiff and the claim against D2 is for breach of his fiduciary duties owed to the plaintiff.

The Chinese Medicine Ordinance

2.  As the central issues of this case concern the registration of a Chinese herbal tea under the Chinese Medicine Ordinance (Cap 549) (“CMO”), I shall first briefly set out the key provisions of the CMO so that the facts and issues of the case could be better understood.

3.  The CMO was passed by the Legislative Council on 14 July 1999.  Under Part XIII of the CMO, registration of proprietary Chinese medicines (“PCMs”) was required in order for them to be manufactured, sold or supplied in Hong Kong.

4.  Section 119 of the CMO, which came into effect in December 2010, states that:-

“(1) Except under and in accordance with this Ordinance and subject to subsection (2), no person shall –

(a) sell; or

(b) import; or

(c) possess,

any proprietary Chinese medicine unless the proprietary Chinese medicine is registered under section 121.”

5.  Under Part XIII of the CMO, two types of registrations are available: registration under section 121 (“Formal Registration”) and transitional registration under section 128 (“Transitional Registration”). But ultimately, all PCMs have to undergo Formal Registration in order to be legally available in Hong Kong.

6.  Manufacturers or importers of PCMs that had been manufactured, sold or supplied for sale in Hong Kong before 1 March 1999 were entitled to apply to the Chinese Medicines Board (“CMB”) for Transitional Registration.  PCMs registered under the Transitional Registration would be issued an HKP registration number and pending determination of the final registration, the PCMs could continue to be manufactured, sold or supplied in Hong Kong.

7.  In response to the strong request from the industry, the CMB made a further concession by way of a non-statutory “Non-Transitional” registration scheme (“NT Registration”) whereby manufacturers or importers of PCMs that had entered the Hong Kong market after 1 March 1999 could also apply for the same benefits as the Transitional Registration scheme pending determination of their application for Formal Registration. Upon NT Registration, an HKNT registration number would be issued.

8.  After registration under the Transitional Registration (for pre-March 1999 PCMs) and NT Registration (for post-March 1999 PCMs), the PCMs could be available in Hong Kong but they would have to continue to apply for Formal Registration and if such application fails, they could no longer be available in Hong Kong.

9.  The initial application cut-off date for both Transitional and NT Registration was 30 June 2004.  It was later extended to 31 March 2010.

Background facts

10.  The plaintiff is a Taoist organization incorporated in 1972 under the old Companies Ordinance (Cap 32) with the object of promoting Taoism.  In addition to its religious activities, the plaintiff has also had a history of providing free Chinese traditional medical consultation and Chinese herbal medicinesto its members and participants of its activities.

11.  D1 is a Hong Kong incorporated company engaged in the pharmaceutical business.  D2 is the controlling shareholder and director of D1.

12.  D2 was one of the five chairpersons of the plaintiff until around May 2010.  “Chairpersons” in the plaintiff’s organizational structure is akin to that of a director of a company. D2 is also a registered pharmacist in Hong Kong and is generally familiar with the rules and regulations governing traditional Chinese medicines in Hong Kong as a result of running his business and being involved in the consultation process for enacting the CMO.

13.  One of the most popular medicines provided by the plaintiff is called Stomach SED (“the Tea”).  It was freely distributed to the members of the plaintiff and not sold or otherwise available outside the plaintiff.  Sometime in 2001, D2 was given the recipe of the Tea so that he could procure a Chinese affiliate of D1 to manufacture the Tea in China and import it into Hong Kong for supply to the plaintiff.  The plaintiff would place its orders with D1, through D2.  D1 would then arrange the manufacture and import of the Tea at a price that would allow some small profits to D1. No one ever complained about the profits made by D1, not even in this case.

14.  In late 2003, the five chairpersons of the plaintiff became aware of the introduction of the CMO.  Although there is a dispute as to the specific instructions given at the time, there is little doubt that something need to be done under the CMO with respect to the Tea (and some other PCMs of the plaintiff, discussed below) so as to enable it to be continuously supplied to the plaintiff, and that D2 was the person entrusted to handle it.

15.  On 25 June 2004, D2 submitted an application to register the Tea under D1’s name under the NT Registration scheme.

16.  At an Executive Committee Meeting of the plaintiff held on 4 July 2004, it was briefly mentioned that the registration of the Tea was in progress.  But no details about the application or the progress of registration were discussed or recorded.  The minutes of that meeting was the only document of the plaintiff in which the application for registration of the Tea was mentioned.

17.  In 2008, the CMB confirmed the NT Registration of the Tea and a confirmation number of No HKNT-04951 was given to D1.  The registration status of the Tea was also displayed on the CMB’s website.

18.  Between the latter part of 2010 and March 2011, disputes over the management of the plaintiff arose.  D2, the plaintiff’s honorary legal adviser Mr Chong Kai Man and some other persons formed a camp.  Mr Chan Joy Sing (“CJS”), Mr Luk Yau Tong, Mr Kwan Yau Hang and some other persons formed another camp.  As a result of such disputes, a number of High Court actions were commenced.  In May 2010, D2 was not re-elected as a chairperson of the plaintiff and around that time the plaintiff also stopped ordering the Tea from the defendants.

19.  It was also around this time that the plaintiff, more particularly persons in CJS’s camp, discovered that the Tea had been registered under D1’s name.

20.  In March 2011, Mr Luk requested D2 to acknowledge in writing that D1 held the Registration as importer of the Tea on behalf of the plaintiff.  D2 refused to do so.

21.  On 12 January 2012, the plaintiff requested the defendants to provide allinformation regarding their dealings with the Tea and declare a trust over the registration on behalf of the plaintiff.  It also requested information regarding the registration status of the Tea at the time.  The defendants refused the plaintiff’s requests on the basis that they had applied in their own legal capacity and not as an agent of the plaintiff.

22.  Between April 2012 and August 2012, the Department of Health (“DOH”) wrote several letters to D1 asking for the necessary documents required for the Formal Registration of the Tea.  Despite the last letter of August 2012 specifying that it would be the last notice given, the defendants did not give any reply.

23.  Consequently, the Formal Registration of the Tea was refused in January 2013 and the registration status of D1’s application was taken off the CMB’s website in February.

The plaintiff’s claims

24.  In the amended statement of claim, the plaintiff set out nine instances of breaches of fiduciary duty on the part of D2. In his closing submissions, Mr Kwok for the plaintiff shortened the list to five. I do not think I need to set them all out and deal with them one by one.  Central to the plaintiff’s case is that it had entrusted D2 to register the Tea, D2 should have done it in the name of the plaintiff, D2’s failure to do so and his failure to advise the plaintiff on all matters incidental thereto so that the plaintiff could protect its interest under the CMO constitute the basis of the claim against D2. All other allegations of breaches are merely subsidiary or incidental to this central claim.  And they stand or fall with the central claim.

25.  As against D1, the basis of plaintiff’s case is said to be agency or sub-agency, ie, D1 was the plaintiff’s agent or sub-agent in registering the Tea.  It failed to do so properly, and it also failed to keep the application for registration alive and maintain its status as registered importer for the Tea.

26.  In my view, the way the plaintiff pleaded its case against D1 is unnecessarily complicated. D1 is clearly a mere corporate instrument of D2 in this matter.  If D2 is liable, D1 must also be liable for dishonestly assisting in D2’s breach of duty (see Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4).  There is no need, and it adds nothing but complications, for the plaintiff to plead that D1 was somehow constituted the agent of the plaintiff.  Mr Kwok for the plaintiff sought to argue that by accepting reimbursement of some testing fee from the plaintiff, an “agency by conduct” was formed.  Mr Chain for the defendants said this is something unheard of in law.  I do not think I need to rule on that.  Even if any agency or sub-agency is established, the terms of such agency must be the same as that which govern the relationship between the plaintiff and D2. D1’s case simply stands or falls with D2’s case. 

The scope of D2’s fiduciary duties in this matter

27.  The first issue that I have to deal with is the exact task that D2 was entrusted with in late 2003 and the scope of duty that he had assumed.  This issue is to be determined partly by evidence pertaining to the express instructions that were given to him (if any) and partly by inference from all the circumstances existing at that time, including the legal background of Chinese medicine regulation and the respective positions of the plaintiff and D2.  The mere fact that D2 stood in a fiduciary position to the plaintiff is not sufficient for deducing all his duties.

28.  The importance of context in fiduciary relationships has been emphasized time and again.  Mr Chain refers me to this classic dictum of Fletcher Moulton LJ in Re Coomber [1911] 1 Ch 723 at 728-729:-

“Fiduciary relations are of many different types; they extend from the relation of myself to an errand boy who is bound to bring me back my change up to the most intimate and confidential relations which can possibly exist between one party and another where the one is wholly in the hands of the other because of his infinite trust in him. All these are cases of fiduciary relations, and the Courts have again and again, in cases where there has been a fiduciary relation, interfered and set aside acts which, between persons in a wholly independent position, would have been perfectly valid. Thereupon in some minds there arises the idea that if there is any fiduciary relation whatever any of these types of interference is warranted by it. They conclude that every kind of fiduciary relation justifies every kind of interference. Of course that is absurd. The nature of the fiduciary relation must be such that it justifies the interference. There is no class of case in which one ought more carefully to bear in mind the facts of the case, when one reads the judgment of the Court on those facts, than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them.”

29.  More succinctly, Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 stated at para 84:-

“In accordance with these comments it is now acknowledged generally that the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case.”

30.  Given that the Tea was first available in Hong Kong in November 1999 only, it is not disputed that the Tea could only fall within the scope of NT Registration.  The disagreement concerns the specific instructions given by the plaintiff to D2 regarding other aspects of the registration.

31.  At the trial, in response to questions from the bench, CJS gave evidence to the effect that not only was D2 instructed to register the Tea, he was in fact specifically instructed to register it under the plaintiff’s name, and specifically instructed to name the plaintiff as the importer of the Tea.  The other witness for the plaintiff, Mr Luk Yau Tong, who was allegedly present at the meeting in which D2 was instructed said he did not recall any such specific instructions.

32.  D2 in his evidence denied that there was even any formal entrustment to him.  He gave evidence that there was not a specific meeting in which he was instructed.  It was not disputed that at the time around the end of 2003, the parties were on very good terms.  They (the chairpersons and Mr Chong Kai Man) often held informal meetings at the clinic of CJS or the plaintiff’s premises.  No agenda was set and no minutes were ever taken for those meetings and hence there was no or only very loose follow up of any actions agreed to be taken in those meetings.  It was in one or more of such meetings that the issues pertaining to the introduction of the CMO were discussed.  Seeing that the CMO would threaten the continued supply of the Tea (and some other PCMs of the plaintiff) to the members of the plaintiff, the mood of the meeting was to tackle this problem.  As D2 has been supplying the Tea to the plaintiff, he was naturally asked to tackle the problem as far as the Tea was concerned.

33.  In D2’s understanding and memory, that is what he was entrusted to do, to tackle the problem of the continued supply of the Tea to the members of the plaintiff.  There were no specific instructions whatever to D2 as to the mode of registration that he has to achieve for the Tea.  All that the chairpersons wanted was the continued supply of the Tea and they simply were in no position to understand the intricacies of CMO as to different modes of registration.  Mr Chong, a witness for the defendants, went further to suggest that given CJS’s education and background, he simply would not be able to understand the differences between different types of registrations.  The plaintiff did not call evidence to rebut Mr Chong’s allegations in this regard.

34.  In the event, D2 chose to register the Tea under the NT Registration scheme in the name of D1 as the importer of the Tea.  He did so as he thought this was the most proper and easiest route to tackle the problem at that time.  In fact, at that time he was of the view that there was simply no alternative. He believed at that time that the plaintiff neither qualified as an importer nor manufacturer of the Tea within the meanings of the CMO.  Having heard what the plaintiff’s expert said in his evidence, he now conceded that the plaintiff might be qualified as a “manufacturer” by reason of the packaging activities that it undertook with respect to the Tea.  But he maintained that at the material time in 2003 and 2004, this had never occurred to him.  (I shall have more to say about the plaintiff’s entitlement to be registered as a “manufacturer” of the Tea below.)

35.  Having heard both parties and considered the evidence before me, I found the defendants’ version to be much more believable.  Those alleged specific instructions to D2 were not in fact pleaded.  They were not even mentioned in CJS’s witness statements or his evidence in chief.  It was only after direct questioning from the bench thatCJS claimed that the plaintiff had instructed D2 to register under the plaintiff’s name and as an importer.  I am very doubtful that such specific instructions could have been given.  At the time the alleged instructions were given (late 2003), the parties were dealing with an entirely new piece of legislation with complicated provisions.  During this initial period, the CMO was not fully understood by many and would have been a difficult piece of legislation even for legal practitioners.  It seems largely improbable that the chairpersons of the plaintiff could have had such extensive knowledge regarding the different types of registrations, let alone whether it qualified as an “importer” or a “manufacturer.”  It is also pertinent to note that the plaintiff has not been able to plead the exact date of the meeting in which the entrustment to D2 was made and there was no written record at all of the entrustment.  All these testify to the casual manner in which D2 was given the task.

36.  Further, I also found that given the scope of D2’s duty that I described above and the context in which it was undertaken, there was no expectation that he should continuously report and advise the plaintiff of the progress of application.  And it was also not pleaded, and indeed it would be contrary to common sense, that D2 had undertaken to successfully register the Tea at all cost and at his own expense.  D2 achieved an NT Registration of the Tea which ensured its continued availability to the plaintiff until its Formal Registration was rejected in 2013.  The other PCMs of the plaintiff, which were supposed to be taken care of by another chairperson of the plaintiff, CJS (who also carries the title of the “Controller of the Department of Medicine” of the plaintiff, was in possession of all the recipes and involved in the manufacture and supply of those PCMs to the plaintiff), never achieved any registration.  It seems no applications to register them had ever been made.  If the plaintiff was really so concerned about the registration of the Tea in its own name, one cannot help to wonder what happened to those other PCMs of the plaintiff, why no action seems to have been taken for the failure to register any of them under any mode of registration and why the treatments of D2 and the other chairperson(s) responsible for the other PCMs were so different.

37.  When I consider the actual circumstances in which D2 may have been given the task, I cannot avoid forming the impression that the duties now pleaded against the defendants and their alleged breaches are very much legal constructs created with afterthoughts and legal assistance for the purpose of this litigation.  As Fletcher Moulton LJ reminded us more than 100 years ago, lawyers and judges should never divorce themselves from reality and apply legal concepts in vacuum.  Whilst it may be said that D2 was a fiduciary in relation to the plaintiff, nothing much follows from that if one does not consider the factual circumstances pertaining to such relationship and the transaction in question.  Such circumstances include the facts that the plaintiff is a religious charity; all the chairpersons, and many others involved in running it, are volunteers, not high pay professional managers; their relationship was very good at that time; their meetings, and much else about the plaintiff’s management, were informal; no other PCMs of the plaintiff had applied for or achieved any registration.  In these circumstances, it is highly artificial to plead a case against D2 as if he were a director of a listed company or a professional consultant engaged to do the registration at a substantial fee.

The spiritual writing and other PCMs of the plaintiff

38.  D2 and Mr Chong are of the view that CJS should be responsible for registration of the other PCMs.  CJS denies this.  The reason given by CJS as to why the plaintiff only applied to register the Tea but not other PCMs is a religious one.  In short, it was an instruction from the spiritual leader（壇主）of the plaintiff given through spiritual writing （扶乩）on 13 June 2004.  The spiritual writing said:-

“司玉所求，有關政府管制中成藥，本觀中成藥應否註冊一事，官字兩個口，口講無憑，立字為據。時遷法亦遷，與時俱進，洞悉先機，依今之情，可先註冊和胃茶，以作將來之須。註一豁十，別有玄機，此事可交由劉文煒副主席主之。”

39.  Mr Chong, a barrister that has practiced Taoism for many years, emphatically asserted that the spiritual writing obtained by CJS must be false as the spiritual leader would not give any instructions to the plaintiff to defy the law for no good reason, and that it was motivated by CJS’s desire to keep the recipes of those PCMs secret to himself.

40.  I know nothing about the practice of Taoism but I am inclined to agree with Mr Chong.  The spiritual writing did not give a logical or coherent explanation of the strategy of “註一豁十” (registering one and exempting 10), and, from the plaintiff’s present stance, entrusting the matter to D2 as instructed by the spiritual writing now appears to be a very wrong prescription.  If CJS and other chairpersons truly believe in this spiritual writing, I wonder why they now regret so much about entrusting the matter to D2.  Further, it appears from the wording of the spiritual writing that the “註一豁十” strategy was only meant to be a temporary one and the plaintiff should keep on monitoring the situation.  Yet from the time of the spiritual writing up to now, it seems nothing was done with respect to the registration of the other PCMs, and no further instruction was sought from the spiritual leader in this regard.

41.  Of course as a matter of law it is not a pre-condition for the plaintiff to first take action against whoever is responsible for the failure to register other PCMs before it could sue the defendants for the alleged breach of duties.  Yet the exact scope of the duties imposed on the defendants would have to be assessed in the background of what was happening to all the PCMs of the plaintiff for there should be a strong presumption that all directors of the plaintiff should be treated equally.

Was D2 in breach of his fiduciary duties?

42.  Against the background described above in which D2 was entrusted to register the Tea, I fail to see how D2 could be said to have traveled outside the scope of his duty.  Albeit under D1’s name, the registration itself was primarily for the benefit of the plaintiff.  D1 would continue to make small profits from the supply of the Tea to the plaintiff as before but it would make no difference in this respect whether the Tea was registered in the name of the plaintiff or D1.

43.  It is not disputed that from the moment the Tea was first manufactured in China by D1’s affiliate factory, D1 had supplied the Tea to the plaintiff only.  This did not change after the application or successful registration of the Tea under the NT Registration.  Furthermore, the defendants made it clear that they would have continued to supply the Tea to the plaintiff, and the plaintiff only. For reasons unknown to the defendants, and probably related to the disputes between the two camps in the plaintiff, the plaintiff stopped to order the Tea from the defendants sometime in 2010.  However, even after that, the defendants never supplied the Tea to any other persons.

44.  Hence, the fact that the registration was done under D1’s name does not detract from the conclusion that the registration was nevertheless for the benefit of the plaintiff.  Although the defendants now admit that the plaintiff might be qualified to apply as a manufacturer (whether it would have been successful is a different matter), it is not disputed that D1 clearly qualified as an importer and had been acting as an importer for the plaintiff since 2001.  Therefore, it was entirely reasonable for D2 to take the view that registration should be done under D1’s name, as long as the registration itself was for the benefit of the plaintiff.

45.  Since it is established that D2 had carried out the task entrusted to him, the plaintiff’s argument that D2 was in breach of his duty by deliberately misleading the plaintiff and concealing the fact of D1’s registration must fail, as, from the defendants’ view point, the task had been successfully completed, there was nothing to hide and nothing special to report.

Was it possible for the plaintiff to apply for registration as a ‘manufacturer’?

46.  Another line of argument raised by the plaintiff was that given that D2 was entrusted to register the Tea for the benefit of the plaintiff, he should have informed and advised the plaintiff that it could have applied in its own capacity as a manufacturer.

47.  The plaintiff claims that it qualifies as a manufacturer.  Section 2 of the CMO defines “manufacture,” in relation to a PCM, as:-

“the preparation, production, packing or re-packing of the proprietary Chinese medicine for sale or distribution, and ‘manufacturer’ shall be construed accordingly.”

48.  “Package” is defined in section 2 as:-

“(a) means any box, packet or other article in which any proprietary Chinese medicine is enclosed; and

(b) in the case where such box, packet, or other article is enclosed in one or more other boxes, packets, or other articles, includes each of the boxes, packets or articles in question.”

49.  The plaintiff claimed that it qualified as a manufacturer because once the Tea was imported into Hong Kong, they would then be externally wrapped and labelled at the plaintiff’s premises in Hong Kong.

50.  There are three answers to this line of argument.  The primary one is that, for the reasons set out above, it is not necessary for the plaintiff to be registered at all for the continued supply of the Tea to it.  Registering it by D1 was sufficient as D1 would continue to supply to the plaintiff.

51.  The second answer is that it is highly doubtful, despite what the plaintiff’s expert (Mr Kwong Ping Nam) said, that the plaintiff could be so registered.  I find the plaintiff’s expert’s interpretation of the CMO rather unnatural.  Whilst the CMO’s definition of “manufacture” sets out a number of activities, it would be very artificial to pick one or two of such activities (such as packaging) to say that whoever undertakes such activities would qualify as a manufacturer.  The plaintiff’s expert claimed that many Hong Kong companies who were only involved in the packaging of PCMs (and were not at all involved in the making of the ingredients) applied to register themselves as manufacturers of those PCMs, apparently to enable the PCMs to be labelled as ‘made in Hong Kong’ in order to gain the trust of the consumers.  I doubt if a religious charity like the plaintiff should do that.  In any event, when I asked Mr Kwong if he was aware of any case of successful registration, he said there was none.

52.  I would have guessed this (no successful case of registration) should be the case.  It should be clear from the legislative intent that the CMO defines “manufacture” broadly in order to enable the authorities to regulate any activities pertaining to the manufacturing process, rather than allowing anyone peripherally involved in the process to claim itself as the manufacturer.

53.  The last answer to this argument of the plaintiff illustrates how experts could be misused.  Whilst the plaintiff’s expert was asked theoretical questions on the interpretation of the definition of ‘manufacture’ to support the plaintiff’s case, he was not asked whether the actual conditions of the plaintiff would qualify itself as a ‘manufacturer’.  Chapter 6 of the “Handbook of the Applications for Chinese Medicines Trader Licences” issued by the Department of Health set out detailed requirements regarding the management and physical conditions of the applicant.  The defendants said it is very unlikely the plaintiff could fulfill such requirements.  The plaintiff led no evidence in this regard, apart from a photograph of enthusiastic volunteers packaging the Tea in an open area without gowns, masks or gloves.

54.  In short, I am not convinced that the plaintiff would have been successful if it applied to register itself as a manufacturer by reason of the packaging activities that it undertook in its premises, which involved merely putting the small packs of the Tea into a paper box together with a piece of paper containing the directions for use.  I may be wrong but in any event given the uncertainty as acknowledged by the plaintiff’s expert, it is entirely reasonable, and even proper, for D2 not to have advised the plaintiff to do so.

55.  Here I shall deal briefly with another related argument of the plaintiff’s counsel made at his closing submission, that “evidence at trial shows that an application filed in 2004 needs not even identify whether the applicant applies as an importer or manufacturer. What is required is just filling out an application form and paying a fee of HKD1,000.… D2’s excuse was that P was not entitled to apply either as importer or manufacturer.  Such an excuse is not justified as he confirmed in evidence that filling the application for D1 was simple, almost without any filtering or specific requirement as to whether the applicant applies as an importer or manufacturer ….”  In short, Mr Kwok was arguing that D2 should have made use of a loophole in the application form to sneak in the plaintiff’s name as the applicant as the form did not require the applicant to declare whether it was an importer or manufacturer.  I set out such argument here just to express my amazement. 

Did the defendants gain any benefits or cause any loss to the plaintiff?

56.  If D2 had derived any personal benefits without the consent of the plaintiff from the task entrusted to him, or cause any loss to the plaintiff in the course of executing the task, then he may still be liable to account to the plaintiff even if he subjectively believed that what he did was in the plaintiff’s best interest.  So, the question is, is that the case here?

57.  In this case, there seems to me neither any loss suffered by the plaintiff nor any benefit obtained by the defendants.

58.  The plaintiff claimed that by registering the Tea under D1’s name, the defendants obtained the benefit of having control over the legal supply of the Tea to the plaintiff. Correspondingly, this affected the plaintiff’s interest in ensuring a steady uninterrupted supply of the Tea and subjected the plaintiff to the mercy of the defendants.  However, faced with the fact that there was actually no interrupted supply from D1, they said if there were to be any changes in D1’s ownership, or in the more far-fetched event that D1 went bankrupt, the supply of the Tea would be interrupted.

59.  Not only are these mere speculations, they are also legally unsound and are based on a misunderstanding of the CMO.  Under the CMO, what was required to be registered was the Tea itself, rather than the proprietor.  Registration of the Tea enables it to be imported and sold or supplied in Hong Kong by whoever importing it.  Unlike a trade mark or a patent, it does not confer any proprietary right on the person registering.

60.  Section 119 requires that the “proprietary Chinese medicine” be registered and section 120 sets out who is entitled to make an application for the registration of “a proprietary Chinese medicine”.  Once approved, the CMB may “register the proprietary Chinese medicine and issue a certificate of registration” under section 121.

61.  Parallel importing is not prohibited under the CMO.  It would only be governed by the general law concerning intellectual property, passing off or confidence (which would not affect the plaintiff as the defendants never dispute that they got the formula of the Tea from the plaintiff).  Section 119 only prohibits people from selling, importing or possessing a PCM that is not registered.  Therefore, once a PCM has been registered, anyone holding a wholesaler licence granted under section 135 of the CMO could import and sell the Tea.  The plaintiff could apply for such a licence (if it fulfills the requirements for the grant), or it could import the Tea through another company holding such a licence.

62.  Accordingly, registration of the Tea under D1’s name did not confer upon the defendants rights over anyone else in relation to the Tea.  In fact, the identity of the applicant was only important with regards to who would be subject to the statutory obligations set down in the CMO.  Hence, I fail to see any benefit obtained by D1 or loss caused to the plaintiff as a result of D1’s registration.

63.  At one point, the plaintiff’s counsel suggested that having the Tea registered under D1’s name may increase the intangible value of the shareholding in D1, thus benefiting D2.  Again that is entirely speculative.  The plaintiff had never even pleaded anything about the commercial potential of the Tea.  More importantly, if the formula of the Tea actually had any commercial potential, it would not be up to D1 to exploit it as D2, its controller, would be bound by the fiduciary duty pertaining to the circumstances in which he was given the formula.

The fate of the Tea

64.  As mentioned above, eventually in January 2013, the Tea was rejected for Formal Registration and its registration under the NT Registration scheme expired.  It was then no longer allowed to be sold or supplied in Hong Kong.  But that has nothing to do with what D2 had been entrusted to do in the beginning.  I do not need to explain the detailed provisions governing Formal Registration.  Suffice it to say that to achieve Formal Registration of the Tea, very substantial expense has to be incurred and the result is still uncertain after incurring such expense.  It is a fact that in Hong Kong the great majority of PCMs that had been on sale before the CMO came into effect now ceased to be available after their Transitional or NT Registration had expired as they failed to achieve Formal Registration because of its stringent requirements.

65.  30 June 2015 is the deadline (extended several times) for holders of Transitional Registration to submit product specification, method and certificate of analysis and general stability test report for their PCMs.  It was reported that by then, less than 5% of previously available PCMs have achieved Formal Registration.  The plaintiff, when properly advised by its expert and legal advisers, must have been aware of the enormous difficulty in achieving Formal Registration for the Tea or indeed any PCMs.  In such light, the ‘registration right’ of any of its PCMs, if it could be said to exist, is of doubtful value.  Yet the plaintiff chose to expend tremendous resources to fight over it, and in the process ruined the relationship and devotion of some of its most dedicated members, which is something much more valuable.

Conclusion

66.  The plaintiff’s claim suffered from some fundamental deficiencies both in law and in fact.  I am satisfied that CJS was either plainly lying or deluded when he claimed that he had given D2 express specific instructions to register the Tea in the plaintiff’s name and as an importer.  When I asked him why D2 committed the alleged breaches of duties and that the plaintiff saw fit to sue him, he said, emphatically, that D2 “見利忘義” (literally forgetting loyalty or integrity because of profit).  However, when I further asked him what benefits D2 had derived or loss was suffered by plaintiff, all he could offer was mere speculations.

67.  Having heard all the witnesses and considered the evidence, I am inclined to agree with D2’s characterization that this action against him is one instituted ‘out of spite’.  Such ‘spite’ is also apparent from the fact that the plaintiff’s legal advisers have seen fit to plead exemplary damages against the defendants in a case where even the ordinary damages are hard to identify.

68.  I dismiss the plaintiff’s case in its entirety.  When the hearing adjourned, I asked the parties to submit statements of costs to me for gross sum assessment.  The plaintiff submitted a claim of $1,481,121 whilst the defendants’ claim is $1,544,856.  In light of the small difference between these two amounts, the plaintiff could hardly complain that the defendants’ claim is unreasonable.  It is at a slightly higher level mainly due to the fact that Mr Chain, a very experienced counsel in civil practice, is engaged by the defendants.  The defendants are justified in doing so as serious attacks were launched by the plaintiff at D2’s integrity as a professional and business person.  I order the plaintiff to pay the defendants costs assessed in the sum of $1,544,856.