LO WAI MAN AND CHUNG CHUN MING v. CHUNG KIN MING DANIEL

HCA4766/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4766 OF 2001

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J U D G M E N T

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1. The plaintiff and the defendant operated a business (the "Business") together from about February 2000 to about September 2001, mainly for running English courses for primary schools in Hong Kong. The plaintiff now claims for an account of all income, expenses and profits of the Business and for discovery on oath in respect of these matters, and for an order for payment of all sums found due on the taking of the account. The defendant denies liability to account, and counterclaims for damages for breach of contract.

2. The plaintiff's case is that the Business was a partnership, and that by virtue of section 30 of the Partnership Ordinance, Cap.38 the defendant is bound to render an account of the Business to the plaintiff. Alternatively, a term was implied into the Agreement dated 6 January 2000, which constituted the contract between the parties, that the defendant was bound to render an account. The Business was extended to the provision of other courses particularised in a schedule to the Statement of Claim. The plaintiff repeatedly demanded accounts, as well as the books and related records of the Business. The defendant failed or refused to render them. Further in breach of the Agreement the defendant failed and/or refused to open an independent bank account for the Business. The defendant repudiated the Agreement and the repudiation was accepted by the plaintiff by its solicitor's letter dated 23 October 2001 which terminated the Agreement and the Business with immediate effect.

3. The defendant admits that the parties entered into the Agreement dated 6 January 2000 but denies that the Business was a partnership and further denies the implied term of the Agreement pleaded by the plaintiff. He further raises the following defences :

(1) The plaintiff and the defendant expressly by subsequent oral agreement varied the term of the original Agreement so that no separate bank account was to be opened. Alternatively, the plaintiff represented to the defendant that such separate account was unnecessary. In any event the plaintiff suffered no loss as a result of the non-opening of the separate account.

(2) The plaintiff agreed to rely on the defendant's calculation of the accounts without going into details thereof. Relying on that agreement the defendant agreed to make partial payments of the plaintiff's share of net profits before verification of the accounts.

(3) Alternatively, it was an implied term of the Agreement that, once the profits were divided and paid, either party had the right to ask within a reasonable time for verification of the accounts, but once a reasonable time had elapsed there would not longer be such a right.

(4) The partners in the plaintiff and particularly Lo Chin Man who worked in the Business full time knew or ought to have known about the income and expenses of the Business.

(5) The defendant made several advance payments to the plaintiff who did not raise any queries and accepted the defendant's calculation when it recovered the remaining share of net profits in full and final settlement.

(6) Alternatively the right to have access to the accounts has lapsed by reason of the implied term pleaded above.

(7) Alternatively the plaintiff represented that it would not query the calculations once the profits were shared and a reasonable period had elapsed and is estopped thereby from querying the calculation of the profits.

(8) The term of the original alliance was for the period until June 2000. It was extended by agreement to August 2000 when it ceased. Thereafter the parties orally agreed that the plaintiff would provide services to the defendant as an independent contractor, in consideration of the plaintiff receiving $15,000.00 per month plus commission which the defendant had the right to vary.

(9) It was an implied term of the latter agreement that it would be terminable on reasonable notice. In about August 2001 the plaintiff left without giving any notice of termination, thereby repudiating the agreement, which repudiation the defendant accepted. The plaintiff counterclaims for damages arising therefrom.

4. By a written Chinese agreement (the "Agreement") dated 6 January 2000 the parties entered into a co-operation project to provide English courses taught by expatriates for primary schools in Hong Kong. The Agreement reads as follows :

"Parties : Party A : Si Wei Computer Education Centre (ED 531359, 531383)

Party B : Target Education Centre (ED 529311)

Co-operation Project : To provide English courses taught by expatriates for primary schools in Hong Kong.

After negotiation the parties hereby agree as follows :

1. The name of the entity co-operating with the schools : Si Wei Computer Education Centre (parties would negotiate separately should change be required).

2. Establish a preparation team, with Miss Lo Wai Man being responsible for organising its operational work and preparing the curriculum for the first term (February to June 2000) on a free-of-charge basis, other staff would be employed upon need.

3. The organising committee would rent a room in the office of Si Wei Computer Education Centre on a temporary basis at a rental of $3,500 (rental and utilities charges inclusive).

4. Net Profit Sharing Ratio :

Temporary ratio as follows :

Party A : 55%

Party B : 45%

There would be further negotiation for change after completion of the first term.

5. Financial Management

Bank Account : The parties agree to open an independent bank account in the name of Si Wei Computer Education Centre, and Mr. Chung Kin Ming of Party A would be responsible for the financial management. Upon receipt of the school fees and after payment and provision of other expenses, Parties A and B would immediately divide the profits according to the agreed sharing ratio."

Matters not in dispute

5. It is not in dispute that the Business undertook the projects set out in the Schedule to the Statement of Claim, as follows :

Project	Description	Profit share plaintiff:defendant
1	English courses for local primary schools :	45:55
	(a) Ordinary classes in schools
	(b) Extracurricular activities (voluntary enrolment)
2	Summer English Courses for local primary schools, 2000	45:55
3	English and Mandarin courses and tuition classes for local primary and secondary schools, September 2000 to July 2001	45:55
4	Summer English and Mandarin Courses for local primary and secondary schools, 2001	45:55
5	Summer Study Tour 2001 to the Bond University, Australia	40:60
6	University Entrance Programme, English for Academic Purposes, General English, and recruitment of students for Bond University	40:60

6. Evidence comes from the two partners of the plaintiff, Mr C.M. Chung and Ms Lo Wai Man, and from the defendant himself. It is not in dispute that the plaintiff approached the defendant and proposed the co-operation. After negotiation they agreed the terms which are set out in the Agreement. The name of the defendant's own established business was to be used, because he already had the contacts with the schools. The Business rented a room in the defendant's offices in terms of clause 3. The bank account referred to in clause 5 was, however, never opened.

7. The defendant himself dealt with the financial side of the Business, including bringing in the Business from the various schools, and Ms Lo dealt with the professional side, developing the curriculum, recruiting the teachers and so on. Mr C.M. Chung - I will call him simply Mr Chung, though the defendant has the same surname - took part with the other two in the decision-making.

8. At an early stage, because Ms Lo effectively had to work almost full-time in the Business it was agreed that she should be paid a salary of $7,000.00 per month. In about September 2000, the defendant paid the plaintiff $162,705.00. He gave Mr Chung a sheet of paper on which appears his handwritten calculation of how this figure was arrived at; that appears at page 22 of the document bundle.

9. It is also not in dispute that the defendant paid the plaintiff $60,000.00 in January 2001, $40,000.00 in each of May, June and July 2001 and $65,000.00 in August 2001. He paid a further $106,932.80 in August 2001. The total paid came to $514,637.80.

10. The defendant produced a typewritten account for the Business for the period September 2000 to July 2001. It is actually headed, in Chinese, "English Class Total Expenditure" (page 23 of the bundle). Shortly thereafter he produced a handwritten note of printing costs (page 24); a calculation of rent for the room in his offices which was used by the Business (page 25); figures of income and expenditure for the summer courses in 2001 (page 26) and figures for the study tour to the Bond University (page 27). Also produced by an employee, Venus, was a typewritten profit and loss account for the study tour (page 28) and figures for expenditure on the University Entrance Programme (page 29) and entertainment (page 30). I will refer to all these documents as necessary by these page numbers.

11. From September 2000, the defendant took a salary of $16,500.00 per month from the Business. Ms Lo's salary of $7,000.00 was increased to $15,000.00 per month. These figures appear in page 23. One of the employees, Ponny, whose salary was of $13,000.00 was charged entirely against the Business in the calculations on page 22 is shown on page 23 as drawing a salary of $6,500.00; and it appears that the parties agreed in September 2000 that Ponny, who was originally employed by the defendant would have half of her salary charged to the defendant and half to the Business.

Evidence

12. It is the evidence of Mr Chung that after the first term, i.e. in about June 2000, he and Ms Lo asked the defendant for a profit and loss account and bank account information. The defendant said that only eight schools were involved, so there was no profit and he refused to give the information. The Business carried on and they requested profit and loss accounts for the Projects 1 and 2. Eventually the defendant produced page 22; but he never showed any bank statements or other records or vouchers in support. He did pay the $162,705.00 which the plaintiff received subject to confirmation on verification of the accounts, but such accounts were never forthcoming. Mr Chung kept on demanding accounts, bank statements and vouchers; but the defendant kept on failing or refusing to make them available. The various other payments were made without any calculations or accounts to explain them, and the plaintiff accepted them but always subject to verification when such accounts should be produced.

13. According to Mr Chung, in March 2001, the defendant at a dinner gathering estimated the turnover of the Business from September 2000 to July 2001 at about $5,000,000.00. The net profit to the plaintiff should be about $800,000.00 and the net profit to the defendant about $1,000,000.00. Mr Chung believed these figures should be reasonable because the first semester of the academic year had been completed and school fees received, nearly all the contracts with schools and enrolment admissions had been concluded and so the defendant should have been able to make an accurate estimate. The proportion of net figures to gross appeared reasonable according to Mr Chung's own experience.

14. In early August 2001 the defendant went off to Australia with the study tour to Bond University; something which had come out of the plaintiff's own contacts because Mr Chung and Ms Lo had both studied there. They were told that the accounts were ready so they went to his office to collect them and they got page 23; again without any bank statements or supporting vouchers. They were not happy with this so when the defendant came back they made some queries of him, and he produced the handwritten documents, pages 24 to 27. About this time Mr Chung also instructed the employee, Venus, to produce the account of the Bond University study tour, page 28, and according to him this was produced on 27 August, before the defendant produced his own handwritten pages.

15. According to Mr Chung he and his partner thought the figures they were given were inadequate or suspicious. The plaintiff instructed solicitors and on 27 September 2001 they issued a demand letter to the defendant to provide balance sheets, profit and loss accounts and all relevant documents. However, the defendant refused. Accordingly the plaintiff through solicitors wrote a letter on 23 October 2001 purporting to accept the defendant's repudiation of the Agreement, and to terminate the Agreement and the Business forthwith.

16. Ms Lo's evidence was more or less the same as that of her partner, Mr Chung.

17. The defendant adopted a written statement as evidence-in-chief as indeed did the plaintiff's witnesses but unfortunately this statement simply did not cover many of the matters pleaded, or of which further and better particulars had been given. The thrust of the statement was that the co-operation was temporary, and during its currency he paid profits to the plaintiff at the agreed rate. The plaintiff did not ask to check the accounts because they knew roughly what the net income was. The temporary co-operation was terminated in September 2000 when the plaintiff agreed to become and independent contractor, receiving, through Ms Lo, $15,000.00 per month, plus commission to be paid subject to the defendant's discretion. But by 31 August 2001, the plaintiff had left the defendant's offices without giving notice of termination. On about 10 September Mr Chung produced his own written account in Chinese and demanded payment of $106,932.00 which the defendant paid.

18. The defendant said that a certain number of accounting documents were provided to the plaintiff on request. He had paid the plaintiff, in all, around $650,000.00 and no more was due. Concerning the bank account, he had not opened it. The plaintiff had never pressed him to open it. Both sides saw it as unnecessary. Indeed the plaintiff did not raise the matter because the plaintiff and defendant never formed any separate legal entity.

19. Ms Lo worked full time in the defendant's offices and would therefore know exactly how much income was coming in. He could not understand why the plaintiff wanted to see accounts; he assumed that Mr Chung and Ms Lo had agreed the profits figure at all times.

20. In oral evidence he said that the Agreement was a temporary one; the co-operation was only effective from February to June 2000. He claimed that this was the effect of clause 2.

21. The defendant said that page 22 was given to the plaintiff in September 2000 before the 1st payment was made; it was the profit and loss account of the Business and the contents were true and accurate. He had also produced page 23. In examination-in-chief he said that the account was only for the English classes and not the whole Business but in cross-examination he said that it included the Putonghua classes as well; they only formed a very small part of the total.

22. The defendant said that after Mr Chung had received page 23 he had queried the printing expenses and that was why the defendant had produced page 24 to explain them. It had then occurred to the defendant that he had asked for a low rent in the beginning; so he produced page 25 to show that the plaintiff was paying a lower rent already. In fact he had not deducted the agreed figure of $3,500.00 for rent, but only $3,000.00 per month; and the account on page 23 reflected this. He had also given Mr Chung page 26 at this time.

23. According to the defendant, apart from these queries, there were no others. Page 22 was never challenged nor did the plaintiff ask for vouchers or books or invoices in support of it.

24. So far as the bank account was concerned, the defendant said that during a meeting, the parties had agreed that it would be pointless to open a new account, since the defendant's Business name was in any event being used to solicit new Business. This meeting took place in March or April 2000. From cross-examination, however, it appeared that the decision that the bank account was not necessary was made in September 2000 when, according to him, the relationship changed.

25. He said that Ms Lo's salary had gone up to $15,000.00 in September 2000, because there was a change in the form of co-operation; the plaintiff became a contractor. However it appeared from cross-examination that the only things which changed in September 2000 were the salary and the need for a bank account. The commission, which the defendant insisted was discretionary, remained at 45% of the net profits. He was asked if he knew what "discretion" meant and insisted that he did not understand the English term. He was giving evidence, in any event, in Cantonese.

Evaluation

26. I found the plaintiff's two witnesses straightforward and credible. I did not find the defendant a good witness. As I have indicated, his statement did not cover much of what was in his defence. There were various discrepancies as between his oral evidence-in-chief and cross-examination. Where there is a conflict I prefer the evidence of the plaintiff's witnesses.

Partnership

27. The first question is whether the Business as set up by the Agreement was a partnership; I will return later to the question of whether the relationship changed in September 2000. Section 30 of the Partnership Ordinance, Cap.28 provides :

"Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives."

So if the Business was a partnership, the defendant had a duty to render true accounts; and unless he can show that the accounts he rendered have been settled, he cannot escape liability for an account now.

28. Section 3 of the Ordinance defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". The comment has often been made that this is not very helpful. Section 4 goes on to set out the rules for determining the existence of a partnership and in particular rule (c) provides, subject to various caveats and provisos that the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. Here the parties shared the profits. They were net profits so both parties shared in both the income and expenditure from which the net figure was to be calculated. It is clear from the evidence that they carried on business together in the sense that both sides had a particular role to play, and where decisions on the business were to be made, they were made jointly. It is true that the plaintiff did not put any cash money in at the beginning but it appears that it did not need to because the fees or part of them were paid in advance. So I am satisfied that the Business was a partnership within the meaning of section 3.

Implied term

29. It is necessary to consider this, in case my finding above is wrong. The plaintiff contends that a term was implied into the Agreement that the defendant was bound to render an account. The requirements for an implied term were set out in B.P. Refinery (Westernport) Pty Ltd v. President, Councillors and Ratepayers of Shire of Hastings [1978] 52 ALJR 20. Lord Simon, delivering the majority opinion in that case at page 26, said :

"Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, 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."

30. It seems to me that one only needs to look at the provisions of clause 5 of the Agreement to see that all those conditions apply. It was agreed that an independent bank account in the business name of the defendant be opened and that he would be responsible for the financial management, as indeed, on the evidence, he was. The only way that the plaintiff could know if the financial management was being done properly and that it was getting its 45% of the net profits would be from accounts rendered by the defendant. The contract would not be effective without such a term and it is so obvious that if the mythical "officious bystander" had asked if accounts should be rendered, the only possible answer would have been "Of course." So I am satisfied that the term contended for is to be implied into the Agreement.

31. I turn to the issues raised by the defendant in his defence.

Oral agreement, or representation that no separate bank account was to be opened

32. That the plaintiff would have agreed to in February or March, having signed the Agreement in January, is unlikely, especially given that the parties did not know each other before. The defendant's evidence as to when this agreement or representation was made is inconsistent. Having heard the parties, I simply do not believe that any such agreement or representation was made.

Plaintiff's agreement to rely on the defendant's calculation of the accounts

33. The defendant pleaded by way of Further and Better Particulars that this agreement was made verbally, two or three months after the parties started working together, at a meeting in the defendant's room in the defendant's office when Mr Chung, Ms Lo and the defendant were all present. There is nothing about this meeting in the defendant's statement and nothing specific about it in his oral evidence. Again it is most unlikely that the plaintiff would have agreed simply to take the defendant's word on the figures. Having heard the evidence I do not believe that this happened.

Implied term

34. The defendant pleads that it was an implied term of the Agreement that, once the profits were divided and paid, either party had the right to ask within a reasonable time for verification of the accounts, but once a reasonable time had elapsed there would not longer be such a right. Applying Lord Simon's criteria, I do not see how such a term could be implied. It is neither reasonable nor equitable. It is not necessary. It is not obvious. It is not capable of clear expression; indeed it is not expressed clearly. Counsel seems to say it should be a few months; but how many? I do not find that such a term is to be implied.

Representation that the plaintiff would not query the accounts

35. Again there is no evidence of this, I do not believe that such a representation was made.

Settled account

36. The defendant argues that the accounts which he produced, i.e. pages 22 and 23 were adequate and the plaintiff acquiesced in them. The plaintiff argues that the accounts were not adequate and there was no acquiescence and that in any event, the doctrine of settled account is only applicable in the situation where there is some mutuality between the parties, but not where the whole accounting is to be rendered by one party to the other; see Anglo-American Asphalt Co. Ltd v. Crowley Russell & Co. Ltd [1943] Ch D 324 at 331.

37. In my view pages 22 and 23 are not proper accounts; they are more like informal calculations. While it appears that Mr Chung was satisfied with Venus's account of the Bond University study tour, so far as the general accounts are concerned, having heard the evidence, I do not believe that he accepted them. Nor do I see that the plaintiff's continuing in the Business implies that there was acquiescence.

Change of relationship

38. Finally there is the defendant's contention that the term of the original alliance was for the period until June 2000; it was extended by agreement to August 2000 when it ceased; and thereafter the parties orally agreed that the plaintiff would provide services to the defendant as an independent contractor.

39. The defendant says that this is the effect of clause 2, plus the fact that the ratio of profit sharing in clause 4 was described as being temporary. Also there is the provision in clause 1 for re-naming the Business if change was required. Reading the Agreement as a whole I do not see that it can be construed as extending only until June 2000. It is true that some of the provisions were temporary, or at any rate it was envisaged that they could be changed but that would only apply to those provisions.

40. The plaintiff says that the parties agreed that after September 2000, the plaintiff would be an independent contractor. This in itself tends to support the plaintiff's case for a partnership at any rate at the beginning. But there is simply nothing to support the defendant's evidence of any change of relationship in August or September 2000. There is no specific evidence of what was said, or by whom, at any meeting. The fact that Ms Lo took an increased salary does not infer any change of relationship particularly where the defendant himself began to take a salary at a figure 10% higher, i.e. more or less along the lines of the existing profit-sharing arrangement. The defendant was constrained to admit in cross-examination that nothing had really changed, except for this and, according to him, that there was no need for a separate bank account. I do not believe that there was any change of relationship from September 2000. I am satisfied that the partnership continued.

41. It follows that the plaintiff could not be liable in damages for breach of any oral agreement that it should be an independent contractor because there was no such agreement. It is noted, in fact, that although the defendant counterclaims for damages he has given no evidence of them; not even in general terms, that he was caused loss by reason of the plaintiff's departure.

Result

42. It follows that the plaintiff's claim for an account, and for payment of all sums if any found due thereunder, succeeds. Damages are sought for the defendant's failure to open the separate bank account but this is not appropriate as there is no evidence of any loss. Any loss of interest would, in the present economic climate, be negligible.

43. There will accordingly be judgment for the plaintiff in terms of Prayers 1, 1A, 2 and 4 of the Statement of Claim. The plaintiff will have liberty to apply for further directions under Order 43, rule 3 of the Rules of the High Court.

44. There was some argument for indemnity costs. Such costs are appropriate where a party's conduct causes the court to feel a proper sense of indignation. See Choy Yee Chun v. Bond Star Development Ltd [1997] 1 HKLRD 1327. I do not think the defendant's conduct goes that far. The plaintiff will accordingly have the costs of the action to be taxed if not agreed.

45. The defendant's counterclaim is dismissed with costs to the plaintiff to be taxed if not agreed.

46. Since the judgment is to be handed down the costs orders are nisi.