REXLEY COATINGS LTD. and Another v. CHEUNG SHIU YAN, PETER and Others

1995 No. A1593

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an urgent application for an interlocutory injunction. For reasons which will become apparent in the course of this judgment, a decision on it has to be made by tomorrow. I trust that I will be forgiven for giving judgment this evening on the interesting arguments which have been advanced to me without going into those arguments with the analysis which they would otherwise deserve.

THE PLAINTIFFS

2. The Plaintiffs are two associated companies. Their business is the treatment of rebar steel products by the application of a process known as Fusion Bonded Epoxy ("FBE"). Their factory is in Hoy Fung, Guangdong Province, China. The 2nd Plaintiff owns the factory together with the plant and machinery which is installed there, and is responsible for the industrial and technical side of the business. The administrative and marketing side of the business is carried on by the 1st Plaintiff from its office in Hong Kong.

3. The Plaintiffs have not been in business for long. They produced their first coated rebars in August 1994. However, there are only a few operators in the field, and the Plaintiffs claim to have captured most of the market in Hong Kong. They claim that, as a result, the "Rexley" name has become associated with the FBE process of coating steel reinforcing bars in Hong Kong.

THE 1ST AND 2ND DEFENDANTS

4. The 1st Defendant was until recently a director of both Plaintiffs. He has, so far as I can tell, no executive role in the running of the Plaintiffs' operations, but it looks as if he looked after the interests of one of the shareholders in the Plaintiffs, who had invested a considerable sum in the establishment of the Plaintiffs' business. The 2nd Defendant was until recently a director of the 2nd Plaintiff, and is said to have acted as a director of the 1st Plaintiff. He was, however, the General Manager of the 1st Plaintiff, and in that capacity it looks as if he was responsible for completing the installation of the factory in Hoy Fung and the establishment of the office in Hong Kong, and was responsible for the marketing of FBE products in the region. He was summarily dismissed from that employment on 7th February. That was also the date on which both he and the 1st Defendant resigned as directors of the Plaintiffs, and the date on which the 2nd Defendant ceased to act as a director of the 1st Plaintiff.

THE PLAINTIFFS' CAUSES OF ACTION

5. The Plaintiff's case is that while the 1st and 2nd Defendants were, or acted as, directors of the Plaintiffs, and while the 2nd Defendant was employed as the General Manager of the 1st Plaintiff, the two Defendants surreptitiously established a business in Hong Kong which was to compete with the Plaintiffs. That business was to be operated by the 3rd Defendant, which adopted the word "Rexley" in its name so as to deceive the market into thinking that it had some connection with the Plaintiffs. The Plaintiffs claim that various items of machinery and equipment have gone missing from their factory in Hoy Fung, and they suspect that those items of machinery were taken either to sabotage the 2nd Plaintiff's production, or to equip the factory from which the 3rd Defendant was to operate. Finally, the Plaintiffs claim that the 1st and 2nd Defendants attempted, while they were, or acted as, directors of the Plaintiffs, and while the 2nd Defendant was the General Manager of the 1st Plaintiff, to divert business away from the Plaintiffs by pretending to the Plaintiff's customers, both actual and prospective, that the Plaintiffs had established a new FBE factory in Hong Kong (which was in fact the factory in Yau Tong Bay from which the 3rd Defendant was to operate).

6. I have carefully read the affirmations which the 1st and 2nd Defendants have recently filed in these proceedings. I note that they do not deal with these allegations. They assert that the absence of a response to these allegations should not be treated as admissions by them that the allegations are true. I shall do as they request, and I will not treat the absence of any reference to the allegations as an admission by them that the allegations are true. In that connection, I note that the 1st Defendant contends that the majority shareholder in the Plaintiffs, Mr. Willi Diener, is in breach of a shareholders' agreement to which he and the 1st Defendant were parties. I note that the 2nd Defendant contends that the Plaintiffs are incapable of producing products which are up to various internationally recognised standards, although that was not what he was saying to the Plaintiffs' customers when he was trying to get business for the Plaintiffs. I also note that the 1st and 2nd Defendants both deny having acted dishonestly, or having used any of the Plaintiffs' trade secrets or confidential information.

7. However, the fact remains that they have not denied the factual allegations which the Plaintiffs make against them, and which I have already summarised. I have no doubt that there is a triable issue as to whether the 1st and 2nd Defendants have acted in the way in which the Plaintiffs allege, and that there are triable issues, therefore, as to whether, in those circumstances, (a) the 1st and 2nd Defendants have been in breach of their fiduciary duties to the Plaintiffs as directors of the Plaintiffs, (b) whether the 2nd Defendant has been in breach of the implied duty of fidelity in his contract of employment, and (c) whether the 1st, 2nd and 3rd Defendants have been passing off the business of the 3rd Defendant as that of the Plaintiffs'. Indeed I do not think that Mr. Robert Whitehead for the Defendants sought to argue otherwise.

THE RELIEF SOUGHT

8. Against that background, I turn to the particular relief which the Plaintiffs seek today. It relates to a sub-contract with the GTM-Wan Hin Joint Venture ("the Joint Venture"). The Joint Venture has been awarded a contract by the Mass Transit Railway Corporation in relation to the Kwai Chung Park Viaduct Project. The contract works are to start this month, and they are expected to last 14 months. The Joint Venture proposes to sub-contract the coating of about 5,000 tons of steel. The steel is required for incorporation in the contract works early in May. The Joint Venture's schedule is such that it proposes to award the sub-contract by tomorrow. The sub-contract is worth about $11 m.

9. The Joint Venture is anxious to award the sub-contract to a sub-contractor in Hong Kong. If it has to award the sub-contract to a contractor in Europe or North America, it estimates that that would cause at least 3 months' delay to its current schedule. There are only two contractors in Hong Kong whom the Joint Venture is considering awarding the contract to : the Plaintiffs and a company called R & F Coatings Co. Ltd. ("R & F"). R & F is the new name of a shelf company which the 1st Defendant recently purchased. The 1st and 2nd Defendants are both directors of R & F, as well as being shareholders in it. It is in these circumstances that the Plaintiffs seek an order today restraining the 1st and 2nd Defendants from permitting R & F to accept the sub-contract if the Joint Venture decides to award the sub-contract to R & F.

THE NEGOTIATIONS FOR THE SUB-CONTRACT

10. The Plaintiffs' evidence shows that their negotiations with the Joint Venture for the award of the sub-contract began in July 1994. The negotiations were initially conducted on the Plaintiffs' behalf by Arsenio Bogador, a negotiator employed by the 1st Plaintiff. On 15th July 1994, Mr. Bogador formally confirmed in writing the terms of the Plaintiffs' offer to the Joint Venture. In late August 1994, the 2nd Defendant took over the negotiations with the Joint Venture on behalf of the Plaintiffs from Mr. Bogador.

11. However, from about 7th December, the 1st and 2nd Defendants began to correspond with the Joint Venture on the notepaper of the 3rd Defendant. In a letter of 7th December, the 2nd Defendant explained to the Joint Venture that "the company" had decided to establish a manafacturing facility in Hong Kong, and that the Hong Kong plant would be the primary supplier for the sub-contract, with the China plant as the "back-up". The letter was, on the face of it, intended to convey the impression that the new plant was operated by the Plaintiffs, and the letter did not seek to dispel the implication that "Rexleyfairlite" was somehow associated with the Plaintiffs. The letter also adopted the prices which had been quoted by the Plaintiffs in previous correspondence with the Joint Venture, and it ended by asking the Joint Venture to send a copy of the sub-contract.

12. The Joint Venture responded by sending a draft sub-contract under cover of a fax dated 20th December addressed to the 1st Defendant at "Rexley Holdings". The fax shows, on the face of it, that the Joint Venture believed that the letter of 7th December had come from the Plaintiffs or from a company associated with the Plaintiffs. That is borne out by the fact that the Sub-Contract Documents listed in one of the appendices to the letter included a "Rexley" quotation dated 28th September. On 29th and 30th December, the 1st Defendant wrote on the notepaper of the 3rd Defendant to make a final offer for the sub-contract.

13. The negotiations concluded, however, with the Joint Venture informing the 1st Plaintiff by a letter dated 30th December that it was intending to engage the 1st Plaintiff as the nominated sub-contractor. That letter enclosed the main terms and conditions of the 1st Plaintiffs' intended engagement. This letter was sent under cover of a fax dated 31st December. That fax went even further. Unlike the letter, it was actually signed on behalf of the Joint Venture, and it was not headed "DRAFT". It confirmed the nomination of the 1st Plaintiff as the supplier of epoxy coated steel for the sub-contract. The main terms and conditions of the Plaintiffs' engagement enclosed with the letter which came under cover of the fax had a space for signature by someone for and on behalf of the 1st Plaintiff. It was never signed by either the 1st or 2nd Defendants. Had it been signed, it is arguable that there would then have been a concluded contract between the Joint Venture and the 1st Plaintiff.

THE EFFECT OF THE NEGOTIATIONS

14. What this correspondence shows is that the Plaintiffs have an arguable case for saying that the 1st and 2nd Defendants had been trying, since at least the early part of December, to procure the sub-contract for their own benefit and in the name of the 3rd Defendant. As it is, the 1st and 2nd Defendants no longer seek to have the sub-contract in the name of the 3rd Defendant. They have both stated in their affirmations, though, that they intend to continue their negotiations with the Joint Venture, and that they will take the benefit of the sub-contract, unless restrained by injunction, by or through R & F, using the 3rd Defendant's factory in Hong Kong.

15. In my view, this evidence clearly raises a triable issue as to whether the 1st and 2nd Defendants, in breach of their fiduciary duties to the Plaintiffs, or the 2nd Defendant in breach of his duty of fidelity to the 1st Plaintiff (duties, I should say, which they owed to the Plaintiffs up to 7th February) attempted to divert the benefit of any sub-contract which they may have been awarded by the Joint Venture from the Plaintiffs to the 3rd Defendant. It is, in my view, clearly arguable that R & F is no more than the 3rd Defendant in another guise - the "R" and the "F" standing for Rexleyfairlite - established (albeit since 7th February) by the 1st and 2nd Defendants to enable them to argue that, whatever their breaches of duty may have been prior to 7th February in diverting business towards the 3rd Defendant, those breaches had nothing to do with the attempts of R & F to be awarded the sub-contract since then.

THE APPROPRIATENESS OF INJUNCTIVE RELIEF

16. Is there, in these circumstances, a triable issue as to whether, assuming that the trial of the action were taking place today, the Plaintiffs would be entitled to the injunction sought? In my view, there is. In Cook v. Deeks [1916] A.C. 554, the Privy Council held that it is a breach of duty for a director of a company to attempt to obtain for himself the benefit of a contract which he has ostensibly been negotiating on behalf of the company whose interests he should be protecting. If he manages to obtain the contract for himself, he will hold the benefit of the contract in trust for the company, and will be obliged to account to the company for all the profits he makes. In Thomas Marshal (Exports) Ltd. v. Guinle [1979] 1 Ch. 227, Megarry V.-C. accepted that there was at least a good arguable case for saying that in these circumstances the company would be entitled to injunctive relief. Indeed, Megarry V.-C. was of the view that the company would be entitled to such relief even if the director had already ceased to owe the fiduciary duties which his position as a director attracted. That follows from Megarry V.-C.'s acceptance of counsel's argument to this effect at p.245 C - D :

"... by acting as managing director of the company ... the defendant had established his relationship with the suppliers and customers of the company, and ... even if he ceased to be managing director of the company or to be subject to the service agreement, he could not claim instant freedom to use for himself the relationship which he had established on behalf of the company".

To that extent, therefore, past breaches of duty can sustain an injunction on their own account, and to that extent, therefore, a past breach of duty, other than a breach of the duty not to misuse confidential information or trade secrets, is sufficient to found injunctive relief, thus constituting exceptions to Balston Ltd. v. Headline Filters Ltd. [1987] F.S.R. 330 and Universal Thermosensors Ltd. v. Hibben [1992] 1 W.L.R. 840.

17. I agree with the views of Megarry V.-C., and I propose to follow them. The Plaintiffs have established to my satisfaction that there is a good arguable case (let alone a triable issue) for saying that they would (subject to the adequacy of any other remedies) be entitled to the injunction they seek today, if the hearing today was the trial of the action. I therefore turn to the adequacy of any other remedies which the Plaintiffs may have, and where the balance of convenience lies, though I should add that in view of the conclusions I have reached on the effect of what Megarry V.-C. said in Guinle, it is not necessary for me to consider the proper ambit of the so-called "springboard" doctrine, which Mr. Clifford Smith for the Plaintiffs might have had to rely upon to establish the Plaintiffs' entitlement to interlocutory injunctive relief had the Guinle line of authorities not been available to them.

ALTERNATIVE REMEDIES

18. The alternative remedies which the Plaintiffs have are an account of the profits which R & F would have made on the sub-contract if it had been awarded to R & F, and damages for the loss which the Plaintiffs may suffer as a result of not being able to establish a better position in the market by their performance of the sub-contract had they been awarded it. In my judgment, such remedies would not be adequate remedies for the Plaintiffs. I say that for two reasons :

(i) Neither of the remedies are capable of easy quantification. The claim for damages for loss of the ability to establish a better position in the market is virtually incapable of quantification, and an account of R & F's profits would be fraught with the difficulties inherent in quantifying the profits of a fledgling company on its first contract of substance. It would be extremely difficult to distinguish between R & F's expenditure incurred in the performance of the sub-contract, and R & F's expenditure incurred in the setting up of its business.

(ii) The remedies may be difficult to enforce. Given the circumstances in which it suggested that the 1st and 2nd Defendants brought R & F to the market, the Plaintiffs are entitled to be concerned that the 1st and 2nd Defendants may do what they can to prevent the Plaintiffs getting their hands on the profits which the sub-contract would earn for R & F if it was awarded the sub-contract. The same applies to the Plaintiffs' claim for damages.

19. In view of that conclusion, it is not necessary for me to address the startling proposition advanced by Mr. Smith - derived from para. 43 of the judgment of Lloyd L.J. (as he then was) in P.S.M. International PLC v. Whitehouse [1992] IRLR 279 - to the effect that even if there is a suitable and adequate alternative remedy available to a plaintiff, it is arguable that equity will not oblige a plaintiff to give up his right to injunctive relief and settle for a lesser remedy (albeit a suitable and adequate one) if the breach of duty upon which the plaintiff's cause of action was based is one on which equity fastens on the conduct of the defendant. I leave that issue to be determined by another judge on another occasion.

THE BALANCE OF CONVENIENCE

20. In my view, the balance of convenience favours the granting of the injunction for which the Plaintiffs seek. I say that for two reasons :

(i) The injunction would have the effect of preserving the status quo as it existed before the 1st and 2nd Defendants began their attempts to divert the awarding of the sub-contract to the 3rd Defendant.

(ii) If the 1st and 2nd Defendants had not attempted to divert the awarding of the sub-contract to the 3rd Defendant, it is arguable, as I have already said, that the sub-contract was likely to have been awarded to the Plaintiffs. That is because it is arguable that it had already been offered to the 1st Plaintiff by the letter of 31st December to which I have already referred. That letter admittedly provided that the main terms and conditions were subject to minor amendments, though those minor amendments would not result in a more onerous overall obligation without the 1st Plaintiff's prior approval. It is therefore arguable, as I have already said, that all that was required for the letter to become an enforceable contract was for its contents to be accepted by the 1st Plaintiff, by either the 1st or 2nd Defendants signing it on behalf of the 1st Plaintiff. It is therefore arguable that it was only because the 1st and 2nd Defendants did not sign the letter (because they wanted to secure the sub-contract for the 3rd Defendant) that the Plaintiffs do not now have the benefit of the sub-contract, and that R & F is, but the injunction being sought today, still in the running for it.

THE INTERESTS OF THE JOINT VENTURE

21. Finally, I have considered the position of the Joint Venture. The Joint Venture has expressed concerns about the Plaintiffs' ability to produce a quality of finish which the Joint Venture requires. Its Project Manager has said that it would prefer to award the sub-contract to R & F. I am very conscious that the injunction sought today, if granted, would prevent the Joint Venture from awarding the sub-contract to its preferred contractor, though I have equally no doubt that the court has power, in an appropriate case, to make orders which have the effect of interfering with the contractual rights of third parties : see, for example, paras. 36 and 37 of the judgment of Lloyd L.J. in P.S.M.

22. I cannot, of course, make any findings of fact today about the Plaintiffs' ability to produce the quality of finish which the Joint Venture requires, nor about their ability to comply with the Joint Venture's time-table, but I note that independent laboratory analysis in October 1994 showed that the Plaintiffs' factory was then capable of achieving high quality coatings. I also note that the Plaintiffs are already in business and have carried out contracts, though none, of course, of the size of the sub-contract to be awarded by the Joint Venture, whereas R & F is at present still an unknown quantity.

23. I do not overlook the fact that the Plaintiffs would not be in a position tomorrow to commence work on the sub-contract if the sub-contract was awarded to them tomorrow. The reason for that, they say, is because of the items of machinery which have gone missing from their factory. However, Mr. Smith has told me from the Bar table, on the basis of express instructions that he has received from Mr. Diener, that (a) the samples will be available for inspection by the Joint Venture by 21st March at the latest, (b) although the work cannot commence until early in April, it will take a week or so for the Joint Venture to deliver the steel to the Plaintiffs' factory, and (c) once delivered, it will take the Plaintiff only about two weeks to coat the first batch of approximately 4 - 500 tons of steel which could then be incorporated into the works by the beginning of May.

24. Mr. Whitehead does not agree with that time-table, but in all the circumstances of the case, the desirability of the Joint Venture having an unrestricted choice in the contractor to which it awards the sub-contract, and the possibility of the Joint Venture not being able to instruct a sub-contractor at all in Hong Kong (either because performance cannot be guaranteed by the Plaintiffs to the satisfaction of the Joint Venture, or because of the Joint Venture's concerns about the ability of the Plaintiffs to perform the works in time) are, in my view, outweighed by the importance of upholding the principle that persons should not be seen to be deriving an unfair advantage over their competitors by what are alleged to be grave breaches of their fiduciary duties.

CONCLUSION

25. I therefore propose to grant the injunction sought. I will hear counsel on the precise terms of the order. I should add that if the Joint Venture awards the sub-contract to the Plaintiffs, but if the Plaintiffs nevertheless decide, for one reason or another, that they cannot accept the sub-contract on the terms on which it is offered, for example, because they fear that they cannot comply with any contractual time limits, the Defendants must have liberty to apply in that event to discharge the order that I propose to make.