CCA MANAGEMENT CO. LTD. v. SHENZHEN SAND RIVER GOLF CLUB LTD.

HCA14679/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.14679 OF 1996

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J U D G M E N T

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1. In this action, the Plaintiff claims damages arising from a management agreement which was entered into between the parties for the management of a new club that was going to be operated in Shenzhen called the Sand River Golf Club.

2. There are a number of issues in this case and the parties have agreed that I should try as a preliminary point whether the management agreement, which is in writing, was varied to such an extent that permits the Defendant to get out of their contractual bargain in a certain event happening.

3. The background is relatively straightforward. There was a club being constructed, CCA Management are well known operators of clubs, run at the material time by Mr Dieter Klostermann and Mr Jayson who was a managing director. They entered into a management agreement together with a technical agreement in 1993. The technical agreement essentially was to provide technical advisory and licensing matters and the management agreement is relatively standard, albeit a rather lengthy document, method of managing, which is common both in hotels, joint ventures and this sort of situation.

4. The management agreement was for a period of 10 years. It, of course, has to be for a very lengthy time because the operation of such a new venture, a golf club, which involves substantial construction, attraction of members and no doubt operating losses when it first begins. It has to be for a substantial period of time so that the management company can recoup its profits - deriving mainly from either a management fee or share of the profits and this particular agreement contains both of those.

5. There are a number of problems which arose in the operation of this club. Substantial delays had occurred, and problems arose because it was in the mainland and because of personalities which are not necessary for me to decide, but there were a number of problems. The Plaintiff did not assist matters because albeit that the club was not operating and the management agreement essentially was to operate from the date of the club opening, they provided, as suggested under the technical agreement (I do not think anyone ever addressed their minds as to what was the legal position) but they provided young and experienced managers assistant managers and not unnaturally, the Defendant was obviously troubled about this.

6. The real trouble, however, in my judgment, was probably one of finance caused probably by the delays in operating and the number of problems which arose in the course of the construction of the golf course and club house. There were a number of matters relating to its construction, its layout and a number of intricate details that go into the successful operation of this sort of venture. It may well be that the Defendant found itself in financial difficulties.

7. As I said the managers seemed to be coming and going with the great frequency and the problems came to head in 1995. There was a meeting on 12th September 1995, this had been arranged between the parties. There was some correspondence which is not necessary to go into, which demonstrate that Mr Pun, who gave evidence on behalf the Defendant, was having problems with the club, he did not think the management was particularly good and he wanted to have his fees cut down. First of all, he had an obligation to pay US$250,000 under the technical agreement, and he thought the level of advice being given to him and the help from the Plaintiff justified him in asking for a reduction. He was trying to get it by correspondence which was not successful, and he wanted also a cut back in the monthly maintenance fee because the 18-hole golf course had not been constructed.

8. What happened was that a lunch meeting was arranged at the Hong Kong Club, where Mr Klostermann, Mr Jayson and Mr Pun were present. They had a discussion over lunch essentially, in my judgment, to relieve the Defendant company of its financial obligations in the sense that the Defendant was trying to get as best he could, a reduction of the US$250,000 and the management fee which was payable monthly.

9. I have heard these three witnesses give evidence. Quite frankly, none of them impressed me very much. I thought that none was as frank to the Court as they should have been. Mr Klostermann conveniently forgot certain matters, Mr Jayson possibly had better recollections and Mr Pun's recollection has been examined by me as well.

10. There is no doubt at the meeting that the object of Mr Pun was to try to get this money reduced, and no doubt he put forward every possible complaint about the Plaintiff's method of operation as he could. I have no doubt at all he did mention about the number of managers that had been coming and going. Presumably he used this as a lever to get a reduction in the money, and he told the Plaintiff that he was upset that there were these managers coming and going. He said about Mr Saye who was the last manager, who had been there three months by the time of this meeting, that he was happy with him and said he hoped Mr Saye would be the last manager. Mr Jayson said that they hoped so too. No doubt at all, that was the gist of the conversation that took place. Mr Klostermann, as I said, seemed to conveniently forget that. I was not terribly impressed with his evidence.

11. I accept what Mr Jayson said, I think there was a discussion and I think the Defendant was led to believe that they hoped that this would be the last manager. Later on, as is found in a handwritten document with notes taken of the conversation between Mr Knipp, who became the managing director, and Mr Pun, the words "a gentleman's agreement" is found. I think that is really what this was all about : Mr Pun did want there to be no more managers and the Plaintiff, in my judgment, did tell him that they hoped there would not be anymore.

12. It is an important matter for clubs, when they are setting out at the start of their careers, to have a manager who can give continuity, not only in the operation but in the members, members like to know who the manager is and who they can go to with their problems. If they keep coming and going, I am sure it is highly disruptive for the club's life.

13. A letter was written by Mr Jayson on 13th September setting out what was said and they had decided to reduce by US$50,000 and to reduce the monthly payment to $5,000, commencing on 1st September and that would be until the 18-hole course has been completed, and then it would revert to the full fee of US$60,000. Mr Pun got this letter and examined it, he was faxed for an answer, he considered it and made some alterations and then signed it as the actual record of what was called the "New Agreement" - it is a variation of the written agreement. He acknowledged that all the other terms and conditions remain in force. In other words, this was still a 10-year agreement.

14. The position came to head when in June 1996 there was brought to Mr Pun's attention by a letter that Mr Saye was leaving. It was said in the letter that he really wanted a change. Mr Pun was upset because he was told, or found out, that in fact the Plaintiff was sending him off to one of their other clubs in Macau. He was incensed about this as he thought it was quite wrong.

15. Mr Pun's account of this September 1995 meeting was that he said that he was promised that this would be the last manager and Mr Saye would not be removed unless there was some reasonable ground for removal. The matters as pleaded are different to the evidence as given by the Defendant because he is now saying that it was a sort of qualified agreement that they had, Mr Saye could be removed for some good reasons, but not for "not a good reason", and he took the view that if the Plaintiff sent Mr Saye off to Macau, this was not a good reason. He wrote a letter in 1996 clearly indicating that he intended, by this, to bring the contractual relationship between the parties to an end, and this is set out in the correspondence.

16. The legal position, in my judgment, is as follows. There was clearly an agreement in writing which provided for a 10-year period. There was also a written variation to that agreement which varied the method of payment, but the term of 10-years continued and there is no doubt at all that the Plaintiffs have the right to hire and fire their own staff, nothing is said about the manager in that sense. I agree with Mr Yuen, who put forward some very interesting submissions that there would be implied in a contract such as this to give both business efficacy to the agreement and clearly would have been within the contemplation of the parties, that a manager which would be provided should be competent. That clearly is an implied term that any manager provided must be a competent person, i.e., someone trained or able to manage a club. I agree with Mr Yuen that there would be in this contract that implied term. I also agree with him that there would be an implied term that the Plaintiff would use their best endeavours to ensure that there were some continuity of employment. However one wishes to phrase that implied term, it is not necessary to put it in precise words, the general basis being that, again it would be implicit in this type of agreement that anyone appointed as manager should be there for a period of time to allow the club to operate successfully. Otherwise, it would completely destroy the whole basis of the operation of a golf club.

17. Mr Carolan submits that they have a right to hire and fire and they can do what they like. In my judgment, that is not right. Otherwise, it would mean they could appoint a new manager every month; put someone in for a month, take him out, put someone else in. First of all, it give tremendous expenses to the club because they have to pay the manager things like removals; secondly, it would cause loss to the club because they would have to train the manager up, it would cost a lot of confidence and it would no doubt prevent people wishing to become members or members wishing to continue. So I agree with Mr Yuen that in this sort of management agreement, there being no express term, as he put it in his submission, that there should be no excessive turnover of general manager. It is not necessary, as I said, to examine the precise English terminology but I agree in general terms that is what the implied term would bring about. There should not be an excessive number of managers appointed.

18. The difficulty, however, in this case is the manager here, Mr Saye, was clearly there from June 1995 to June 1996 - for a whole year - which in my judgment is a satisfactorily reasonable period of employment. I accept that prior to that, before the club was really operating, there appears to me to have been a turnover, the important time, however, is to really look when the club becomes effective. Mr Saye was there for a year and he wants to leave. In my judgment, that did not give the Defendant the right to terminate the agreement.

19. I feel some sympathy towards them. I have not had detailed evidence, but I do not think the Plaintiff, quite frankly, were giving them very good service. Mr Carolan says that I am going to hear all about these matters later on, I look forward to it because, in my judgment, I think considerable amount of sympathy should be given to the Defendants. I think they had a hard time from the Plaintiff.

20. As far as the factual position is concerned, therefore, I do not accept Mr Pun's evidence. Although I accept that there was considerable discussion about the managers, I do not accept his evidence that this was some contractual arrangement. The documents speak for themselves, there is no indication in the letter about this, that this would be the last manager; it would be commercially ridiculous for a company to agree because, for example, he might have been struck down, he might die or some event might have occurred which enable him to leave the company's employment. I think the legal position is that the Plaintiff is under an obligation to use their best endeavours to assure that there is a continuity of management. In my judgment, they did do that by having Mr Saye there for a period of one year before he left. It is not necessary to decide a particular date for the breach, there is no doubt that the letter of Mr Pun indicated that he did not wish to be contractually bound, and the Plaintiff did take steps, which again seems to me to be reasonable steps to ensure that there was a replacement. These are set out in the correspondence, and I do not repeat it. As Mr Pun decided obviously that enough is enough. As I said, I can well understand him getting fed up with the Plaintiff. He thought they were using this manager who was obviously very good, who got on with Mr Pun who may not be the most easy man in the world to get on with, but he is a businessman and some of them are difficult. He thought the Plaintiff was using this opportunity for their own problems, namely to staff the course at Macau. As I said it is not necessary to make detailed findings about that particular matter. On this particular issue therefore, on the only issue at the moment I am deciding, which is not the whole case and is only half the case at the moment, I hold that there was no contractual variation which permits the contact to be brought to an end on change of manager. But I do agree with Mr Yuen, from a legal point of view, that there is an implied term as he has set out, very ably, on excessive turnover and on the facts of this particular case, I do not find that the Plaintiffs were in breach of that. Had the position been that the club was actual operating and there were five or so managers, it may be Mr Yuen would be right. But on the facts of this particular case, I do not agree that there has been any breach of this implied term.

21. Therefore, the case can now continue, if it is necessary on the second aspect, namely whether there has been such gross mismanagement as to permit them to terminate. I ought to indicate this because I have not heard the submission or evidence on it, but it is a slightly odd defence because clearly Mr Pun was very satisfied with Mr Saye who was there for a year. Secondly, there was no complaint made by the Defendant other than to get the reduction of their fees. However, I also think that the claim of the Plaintiff appears to be very inflated. I would have hoped quite frankly, that the parties could see a way to avoid further dispute and litigation between them.

22. As I said I think the Plaintiff ought to recognise that a certain amount of sympathy should be extended to the Defendant. I do not really think they were getting great value for their money. I can assure both parties, that if the matter does come for further argument and submission, I will keep an open mind and make another judgment based solely on the evidence I hear.