ARTICAL PRINTING FACTORY LTD v. HO KING NGAI

HCA 305/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 305 OF 2009

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ASSESSMENT OF DAMAGES

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CASE SUMMARY

1.  This is an assessment of damages payable by the Defendant to the Plaintiff.

2.  The Plaintiff’s claims are for breach of employment contract and fiduciary duties.

3.  The Defendant was represented by Messrs Ha & Ho (the “Defendant’s Solicitors”) in this action from 3 March 2009 until 15 May 2009 when the Defendant filed a Notice to Act in Person.

4.  When the Defendant was legally represented, the Defendant’s Solicitors filed a Defence for the Defendant on 25 March 2009.

5.  No further step was taken by the Defendant in this proceeding after he filed the Notice to Act in Person.  In fact, the Defendant was absent in all subsequent hearings including hearings for case management summons held on 17 June 2009 and for case management conference held on 28 October 2009 and 24 March 2010.

6.  On 14 April 2010, the Court made an order (the “Order”) that unless the Defendant served his List of Documents within 14 days of service of the Order, the Defendant’s Defence be struck out and the Plaintiff be at liberty to apply for Judgment.

7.  The Order was served to the Defendant by inserting through letter-box of the Defendant’s usual or last known address (which is also the Defendant’s address for service stated in his Notice to Act in Person) on 22 April 2010.  Affirmation of Service was filed on 26 April 2010.

8.  The Defendant did not file his List of Documents.

9.  On 9 June 2010, upon the Plaintiff’s application the Court struck out the Defendant’s Defence and entered Interlocutory Judgment against the Defendant.  Pursuant to the Interlocutory Judgment, the Defendant was adjudged to:

(1)  give the Plaintiff an account of all secret profits earned by the Defendant in breach of the employment contract with the Plaintiff and the fiduciary duties;

(2)  pay the Plaintiff damages for the Defendant’s breach of fiduciary duties to be assessed;

(3)  pay the Plaintiff damages for the Defendant’s breach of employment contract with the Plaintiff to be assessed;

(4)  restitute to the Plaintiff the commission obtained by the Defendant by acting in breach of the employment contract and fiduciary duties to be assessed;

(5)  pay the Plaintiff interest; and

(6)  pay the Plaintiff costs of this action.

10.  The Interlocutory Judgment was sent by way of service to the Defendant by ordinary post on 16 July 2010 to the Defendant’s address for service. Affirmation of service was filed on 17 September 2010.

11.  On 6 October 2010, the Court granted leave for the Plaintiff to set down the assessment of damages hearing.  The Plaintiff issued Notice of Appointment for Assessment of Damages (the “Assessment Notice”) on 21 October 2010 returnable on 12 January 2011.

12.  The Assessment Notice was served to the Defendant by inserting through letter-box of his address for service on 21 October 2010.  Affirmation of service was filed on 22 October 2010.

13.  The Defendant did not file any further document nor take any further step in this proceeding.  The Defendant also did not attend the assessment of damages hearing.

14.  I was satisfied that the Assessment Notice had been duly served to the Defendant.  It was the Defendant’s own choice not to attend the assessment of damages hearing.  In the premises, I proceeded with the assessment of damages in this case in the absence of the Defendant.

15.  At the hearing, Mr. James Yu for the Plaintiff confirmed to the Court that the Plaintiff did not intend to pursue the assessment for restitution of commission obtained by the Defendant by acting in breach of the employment contract and fiduciary duties and that the Plaintiff would only pursue its following heads of claim:

(1)  damages for the Defendant’s breach of employment contract with the Plaintiff and the Defendant’s breach of fiduciary duties owed to the Plaintiff;

(2)  account of secret profits earned by the Defendant in breach of his employment contract with the Plaintiff and his fiduciary duties owed to the Plaintiff;

(3)  interest; and

(4)  costs.

THE PLAINTIFF’S CLAIM

16.  The Plaintiff’s was and is engaged in printing business with headquarter in Hong Kong, branch office in the United Kingdom and production factory in China (the “Factory”).

17.  The Plaintiff employed the Defendant as sales executive from about 8 May 2006.  The main duties of the Defendant were to introduce customers to the Plaintiff and to secure and follow up purchase orders from customers.  The Defendant was remunerated with salary and commission.

18.  The Plaintiff pleaded that it had a logistics and mandatory policy (the “Policy”) as follows:

(1) customer would first approach or be referred to the sales team or management for quotation enquiry for jobs;

(2) the enquiry should be sent to the Factory and an internal quotation would be prepared by the Plaintiff’s quotation officer with indication on production costs;

(3) the internal quotation would be sent to the Plaintiff’s managing director for him to verify, approve and decide the percentage or amount of profit the Plaintiff would add;

(4) an official quotation would be sent to the customer;

(5) after negotiation with the customer based on the official quotation and reaching agreement, the management or sales team would send production documents to the Factory asking the Factory to start the printing work; and

(6) after production and, in normal circumstances, before the goods were ready for delivery, the Plaintiff’s accounts department would issue invoice to the customer demanding payment.

19.  The Defendant had been informed of the Policy when he started his employment with the Plaintiff.

20.  In breach of his employment contract with the Plaintiff, the Defendant had failed to comply with the Policy and procured sale of the Plaintiff’s products at prices lower than the usual official quotation causing loss and damages to the Plaintiff.  The Plaintiff claimed HK$4,261,818.13 under this head (the “Under Price Claim”).

21.  The Plaintiff claimed that in further breach of his employment contract, the Defendant had failed to secure proper issue of invoice for all the products produced by the Factory causing the Plaintiff unable to charge the customers for some of the products produced.  The Plaintiff claimed HK$1,140,559.55 under this head (the “Uninvoiced Claim”).

22.  The Plaintiff also claimed that the Defendant set up a company called “Pure Creative Printing Studio Limited” (“Pure Creative”) in competition with the Plaintiff when the Defendant was still under the Plaintiff’s employment. The Defendant procured sale of the Plaintiff’s products to Pure Creative at a price lower than the resale price to Pure Creative’s customers thereby obtained secret profits in breach of his fiduciary duties owed to the Plaintiff.  The Plaintiff claimed HK$213,829.00 under this head (the “Secret Profit Claim”).

23.  The Defendant had on 2 June 2008 agreed to pay HK$600,000.00 to the Plaintiff as partial payment of the loss and damages suffered by the Plaintiff and the secret profits earned by the Defendant.  The Defendant duly paid the said sum to the Plaintiff and the Plaintiff would give credit for the said payment in the Plaintiff’s claims herein.  After giving credit to the said payment, the Plaintiff claimed the net amount of HK$5,016,206.68.

EVIDENCE OF THE PLAINTIFF

24.  The Plaintiff called its Managing Director, Mr. Ho Wai Kuen (“Mr. Ho”), its Assistant to Managing Director, Miss Ho Sze Man (“Miss Ho”) and its Accounting Officer, Miss Wan Wai Chan (“Miss Wan”), to testify at the assessment hearing.

25.  Mr. Ho confirmed and adopted his witness statement filed herein on 24 December 2009 as his evidence.

26.  Mr. Ho stated in his witness statement that he was the Managing Director of the Plaintiff.  Miss Ho, his daughter, was his assistant and his son, Mr. Ho Wing Fai, was the Plaintiff’s General Manager.

27.  Mr. Ho said that the Plaintiff had two sales executives including the Defendant.  Mr. Ho and his son would also deal with sales of the Plaintiff.

28.  Mr. Ho was responsible for approving and assessing contract prices of purchase orders received by the sales executives.

29.  Mr. Ho said that he would approve quotation verbally.  The sales executive would sign the quotation and send it to customer.  After the quotation was accepted by the customer, production order would be issued to the Factory.  After production, the production order and the quotation would be sent to the Plaintiff’s accounts department for issuance of invoice to the customer.

30.  Mr. Ho in his witness statement confirmed the operation of the Policy as pleaded.  He said that he would add 20% of the production costs as overheads and profits of the Factory and add 15% of the ex-factory price as the Plaintiff’s overheads and profits to reach the price to be quoted to customer (“the Formula”).  Mr. Ho said that such quoted price was more or less final and did not have much room for negotiation.  He might increase the Plaintiff’s profit margin for some cases but would agree to reduce profit margin only in exceptional cases and the reduction would not be much.

31.  Mr. Ho testified that he had not authorized the Defendant to quote to customer price below the price calculated in accordance with the Formula.

32.  Mr. Ho said that the Defendant was employed by the Plaintiff as a sales executive.  On about 8 May 2006 the Defendant signed a letter of appointment of the Plaintiff which set out his remuneration including basic salary, sales commission and year-end bonus (the “Appointment Letter”).  Mr. Ho had informed the Defendant of the Policy on the Defendant’s date of appointment.

33.  Mr. Ho stated in his witness statement that when the Defendant was employed, he had indicated to the Defendant that the Defendant should not engage himself in the printing business without prior and express approval of Mr. Ho, nor could the Defendant divert any business from the Plaintiff.

34.  The Defendant switched to become part-time sales executive in about September 2006.  His monthly salary was adjusted to HK$6,500.00 and his sales commission was increased to 4% flat on sales value.

35.  Mr. Ho said that after the Defendant switched to work as part-time, he had agreed with the Defendant that the Defendant would meet him once a day to report business.  However, after one or two months, the Defendant told Mr. Ho that he had to attend his other business and could not attend meeting with Mr. Ho every morning.  Since then Mr. Ho might not see the Defendant once in two to three months.

36.  Mr. Ho said that he expected the Defendant to follow the Formula in submitting quotations to customers and he had never authorized the Defendant to quote in other ways.

37.  In May 2008, Mr. Ho received complaint from an overseas customer, Roger La Borde, that its products samples had been included in the pamphlet of a company called Pure Creative Printing and Roger La Borde had all along only engaged the Plaintiff for its printing works.

38.  The investigation of Mr. Ho revealed that Pure Creative was incorporated by the Defendant on about 20 July 2007.  The Defendant held 60% of its issued shares and was its sole director.

39.  Mr. Ho confronted the Defendant in a meeting held on 2 June 2008 when the Defendant confessed that he had been involved in printing business since 2007.  The Defendant undertook to compensate the Plaintiff for all loss and damages suffered by the Plaintiff arising from and caused by the wrongful competition of Pure Creative.  The Defendant paid HK$600,000.00 to the Plaintiff as partial payment for the Plaintiff’s loss and damages.

40.  Further investigation of Mr. Ho showed that the Defendant had departed from the Policy in that the Defendant had asked the Factory to produce printing works (the “Works”) without internal quotations and without Mr. Ho’s approval for the prices.  Some of the Works were sold to Pure Creative.  The Defendant also determined the sales prices for the Works without Mr. Ho’s approval.

41.  Mr. Ho asked the Factory to produce internal quotations for the Works. Mr. Ho found that the unit prices invoiced for some of the Works were even lower than the production costs assessed by the Factory.

42.  Before Mr. Ho finished the investigation, he decided to dismiss the Defendant’s employment by a letter dated 10 June 2008.

43.  Mr. Ho asked Miss Ho to inquire with the Plaintiff’s customers and customers of Pure Creative.  The inquiries showed that the Defendant had sold some of the Works via Pure Creative at prices higher than the prices charged by the Plaintiff to Pure Creative and thus obtained secret profits.

44.  Miss Ho confirmed and adopted her witness statement filed herein on 24 December 2009 as her evidence.

45.  Miss Ho said that when the Defendant joined the Plaintiff, the Defendant had asked her about the Policy and she had explained the same to the Defendant.

46.  Miss Ho said that after Mr. Ho’s meeting with the Defendant on 2 June 2008, Mr. Ho asked her to investigate into the matter by inspecting all transactions handled by the Defendant.

47.  Miss Ho said that the Defendant had provided to her information on about 40 transactions in which Pure Creative first received orders from customers and then procured production in the Factory by disguising itself as the Plaintiff’s customer.

48.  The Defendant also provided to her a few invoices on transactions between Pure Creative and its customers.

49.  Miss Ho made inquiries with the Plaintiff’s customers and Pure Creative’s customers.

50.  Miss Ho found three transactions in which Pure Creative sold the printing works produced by the Plaintiff to customers of Pure Creative at prices higher than the prices charged by the Plaintiff to Pure Creative.

51.  The three transactions were sale to SHH! Creative by Pure Creative’s invoice dated 10 October 2007, sale to Italee Optics by Pure Creative’s invoice dated 13 November 2007 and sale to Tiger Communications by Pure Creative’s invoice dated 24 March 2008.

52.  In the sale to SHH! Creative, Pure Creative invoiced the goods for US$78,265.00 which is equivalent to HK$610,467.00 at the exchange rate of US$1.00 to HK$7.80 (the “Exchange Rate”).  The Defendant caused the Plaintiff to sell the goods to Pure Creative at HK$420,950.00.  The Defendant made a secret profit of HK$189,517.00 through Pure Creative.

53.  In the sale to Italee Optics, Pure Creative invoiced the goods for US$4,100.00 which is equivalent to HK$31,980.00 at the Exchange Rate.  The Defendant caused the Plaintiff to sell the goods to Pure Creative at HK$22,500.00.  The Defendant made a secret profit of HK$9,480.00 through Pure Creative.

54.  In the sale to Tiger Communications, Pure Creative invoiced the goods for US$9,240.00 which is equivalent to HK$72,072.00 at the Exchange Rate.  The Defendant caused the Plaintiff to sell the goods to Pure Creative at HK47,760.00.  The Defendant made a secret profit of HK$24,312.00 through Pure Creative.

55.  The Defendant had made secret profits in the total sum of HK$223,309.00 out of these three transactions.  As the Plaintiff’s claim in relation to goods sold to Italee Optics under the Under Price Claim exceeded HK$9,480.00, the Plaintiff chose to claim against the Defendant for this transaction under the head of Under Price Claim and only claimed HK$213,829.00 against the Defendant under the head of Secret Profit Claim.

56.  Miss Ho obtained production orders and invoices prepared by the Defendant in respect of the Works except the printing works sold by Pure Creative to Tiger Communications on which no production order was found.  Miss Ho discovered that the Defendant did not follow the Policy by sending production orders for the Works to the Factory without first obtaining internal quotations and Mr. Ho’s approval for the prices.

57.  Miss Ho worked out the usual unit prices of the Works in accordance with the Formula using the internal quotations ordered by Mr. Ho.  She then compared the usual unit prices with the prices stated on the invoices prepared by the Defendant to ascertain the loss of the Plaintiff.

58.  Miss Ho prepared a schedule listing all transactions claimed by the Plaintiff (other than the two transactions claimed under the head of Secret Profit Claim) which I annexed as Schedule 1 to this Decision.  Schedule 1 showed that the Plaintiff’s Under Price Claim amounted to $4,261,818.13 of which $2,023,880.35 was on sales to Pure Creative.

59.  Miss Ho explained Schedule 1 in details at the hearing.  She set out her calculations in Schedule 1 as follows:

60.  In her witness statement, Miss Ho stated that she made her calculations in accordance with the following principles:

(1)  Where invoiced price was stated in United States dollar, she would adopt the Exchange Rate to convert the invoiced price into Hong Kong dollar.

(2)  Where there was film charge for the relevant product in an invoice, she would add the same to the unit price of the product for the invoice on pro rata basis.

(3)  Where quantity shown in production order is unclear, figure in invoice would be adopted.

(4)  Where no corresponding production order was found for items appear in invoice, such items would not be included in the calculation.

(5)  Where neither the Sales Invoice nor the Accounts Invoice (as defined in paragraph 68 below) could be found for a production order, she had checked with staff of the Factory to confirm that the relevant production order was indeed completed as ordered.  She had also checked with accounting staff of the Plaintiff to confirm that no payment was made for these products by customers.

(6)  Where the quantity shown in the invoice was less than the quantity shown in the production order, she had checked with staff in the Factory to confirm the actual production quantity.  She had also confirmed with accounting staff that the customer had only paid the invoiced price.

(7)  She applied 20% profit percentage on the unit production costs and it was then applied with another 15% profit percentage.  After adding up with the film and other fixed production costs, the resultant figure become the usual unit price.

61.  In her witness statement she further stated that for some of the Works the Defendant did not secure the issuance of invoice to customer or procured issuance of invoice with quantity less than the units actually produced which had caused further loss to the Plaintiff.

62.  Miss Ho said that some goods were still kept in the Plaintiff’s warehouse.  She did not know the reason for not delivering these goods to the customers and she had not inquired with the customers concerned.

63.  Miss Ho did not know the actual quantities of undelivered goods still kept in the Plaintiff’s warehouse.  The figures showed in column “M” of Schedule 1 were derived from the quantities stated in the production orders and the invoices issued.

64.  Miss Ho said that since the uninvoiced goods were produced a few years ago, it was unlikely that the customers would agree to pay for them and the goods could not be sold to other customers as they were printing works printed for particular customers.  Miss Ho said that some of the Plaintiff’s customers did not co-operate with the Plaintiff in the Plaintiff’s investigation.  It was most unlikely that these customers would agree to pay for these uninvoiced goods.

65.  Miss Ho calculated the Plaintiff’s Uninvoiced Claim according to the Quotation Price at HK$1,140,559.55 of which HK$754,264.54 was related to goods with Pure Creative as purchaser (see Schedule 1).

66.  Miss Wan was the Plaintiff’s Accounting Officer.  Her duties included handling transactions as notified by the sales executives, issuing invoices to customers and receiving payments.

67.  Miss Wan confirmed and adopted her witness statement filed herein on 24 December 2009 as her evidence.

68.  Miss Wan said that for overseas delivery order, the sales executive would issue invoice (the “Sales Invoice”) to customer.  Based on the Sales Invoice, the Plaintiff’s accounts department would prepare another invoice (the “Accounts Invoice”) for the Plaintiff’s internal accounting purpose.  If the price in the Sales Invoice was in United States dollar, the Plaintiff’s accounts department would convert it into Hong Kong dollar at the Exchange Rate.  The Accounts Invoice would not be sent to overseas customer.

69.  For local delivery order, the Plaintiff’s accounts department would issue Accounts Invoice based on delivery note.  The Accounts Invoice would be sent to local customer together with the delivery note.

70.  Miss Wan said that the Defendant used to deal with only overseas customers.  When the Defendant obtained local delivery orders, the Defendant used the aforesaid overseas delivery invoicing system for those local delivery orders.

71.  Miss Wan said that for all transactions handled by the Defendant, the Plaintiff’s accounts department would prepare the Accounts Invoices based on the Sales Invoices submitted by the Defendant.  Miss Wan said that the Plaintiff’s accounts department did not know the quantities actually produced nor the quantities actually delivered.

72.  Miss Wan said that when the Defendant received an order from a customer, he would inform her about the identity of the customer and the preliminary quantities of the order.  The Defendant would also prepare the Sales Invoice for Miss Wan to prepare the Accounts Invoice after delivery of the printing products to the customer.  She had asked the Defendant whether he had obtained approval from Mr. Ho and the Defendant’s answer was invariably affirmative. She assumed that the Defendant had discussed all the details with Mr. Ho and did not bother to check the same with Mr. Ho.

73.  Miss Wan said that Pure Creative was a new customer introduced by the Defendant to the Plaintiff in about August to September 2007.

74.  Miss Wan was present at the meeting of 2 June 2008 when Mr. Ho confronted the Defendant.  Miss Wan’s evidence collaborated with Mr. Ho on his evidence in respect of that meeting.

75.  Miss Wan also assisted Miss Ho in the investigation.  Miss Wan said that there were productions procured by the Defendant with no corresponding invoices issued or with invoices issued not covering the whole quantities produced and the relevant customers had only paid in accordance with the invoices issued.

Discussion

76.  The Plaintiff claims loss and damages under the following three heads:

(1)  secret profits (i.e. the Secret Profit Claim);

(2)  loss for sales below the Quotation Price (i.e. the Under Price Claim); and

(3)  loss for goods not invoiced (the Uninvoiced Claim).

77.  The Defendant’s Defence had been struck out pursuant to the Order and he adduced no evidence to challenge the Plaintiff’s evidence.

78.  I accept Mr. Ho’s evidence that the Policy was in operation at the Plaintiff at the material times and the Plaintiff submitted quotations to its customers in accordance with the Formula.  I also accept Mr. Ho’s evidence that he had informed the Defendant of the Policy and that he had not authorized quotation at a price below the Quotation Price.

79.  I accept that Mr. Ho had told the Defendant not to engage himself in printing business without prior and express approval of Mr. Ho and not to divert any business from the Plaintiff.  Although these terms were not expressly stated in the Appointment Letter, the Defendant was nevertheless subject to these restrictions during his employment with the Plaintiff.

80.  Employer and employee relationship has always been regarded as giving rise to a fiduciary relationship which impose a duty on the employee not to place himself in a position where his interest would or may conflict with duties owed to his employer (the “Non-Conflict Duty”) and a duty not to make a profit from his position (the “Not to Profit Duty”) (see Kao Lee & Yip v Koo Hoi Yan Donald & Others [2003] 2 HKC 113 at paragraphs 36 and 46).

Secret Profit Claim

81.  This claim is on sales from Pure Creative to SHH! Creative, Italee Optics and Tiger Communications.  Pure Creative was a company established by the Defendant to engage in printing business in competition with the Plaintiff when the Defendant was still under the Plaintiff’s employment and still subject to the Non-Conflict Duty and the Not to Profit Duty.

82.  As pointed out by Viscount Sankey in Regal (Hastings) Ltd. v Gulliver [1967] 2 AC 134 at 137 that:

“The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interest of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust.”

83.  No evidence had been adduced on whether SHH! Creative, Italee Optics and Tiger Communications were existing customers of the Plaintiff or new customers cultivated by the Defendant at his own times when he worked part-time for the Plaintiff.  However, the liability of the Defendant toward the Plaintiff will not be affected as “both in law and equity, it has been held that if a person in a fiduciary relationship makes a secret profit out of the relationship, then the Court will not inquire whether the other person is damnified or has lost a profit which otherwise he would have got.” (per Lord Wright in Regal (Hastings) Ltd. v Gulliver at page 154).

84.  Although the Defendant had switched to work only part-time for the Plaintiff since September 2006, the Defendant was still the Plaintiff’s employee prior to his dismissal on 10 June 2008 and he was still subject to the Non-Conflict Duty and the Not to Profit Duty.

85.  It also does not matter that the secret profits were made by Pure Creative (a separate legal entity) in which the Defendant only held 60% interest.  It makes no difference to the ordering of an account that the wrongdoer has transferred the secret profits to another company.  The fiduciary in breach will still be liable for the whole of the profits even though within the company he may only share in a part of the profits.  In other words, he is accountable for the whole of the secret profits which are made in breach of his fiduciary duty.  It is immaterial that the fiduciary has chosen to share this with others.  (SeeCMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 at paragraphs 98 – 105)

86.  In Imperial Mercantile Credit Association v Coleman [1873] LR 6 HL 189, Mr. Coleman, a director of Imperial Mercantile Credit Association, proposed to the company a contract from the execution of which he derived a profit through a firm in which he was a partner, the House of Lords held that the profit belonged to the company and Mr. Coleman had to account for the profit to the company.  Lord Cairns said at page 208 that:

“The profit on the transaction was obtained by Mr. Coleman, and, in the view that I take, was obtained by him as a director of the association. Whether he desired or whether he determined to reserve it all to himself or to share it with his firm appears to me to be perfectly immaterial. The source from which the profit is derived is Mr. Coleman. It is only through him that his firm can claim. He is liable for the whole of the profits which were obtained; and it is not the course for a Court of Equity to enter into the consideration of what afterwards would become of those profits.”

87.  When the Defendant received purchase orders from SHH! Creative, Italee Optics and Tiger Communications, the Defendant should have referred the purchase orders to the Plaintiff.  By diverting the order to Pure Creative, the Defendant breached the Non-Conflict Duty.  By making profits out of the transactions through Pure Creative, the Defendant breached the Not to Profit Duty.  In the premises, the Defendant has to account to the Plaintiff for the whole secret profits obtained by Pure Creative in these transactions.

88.  As Lawrence Collins J stated in CMS Dolphin Ltd v Simonet at 733 that:

“the fiduciary should be accountable for the profits properly attributable to the breach of fiduciary duty, taking into account the expenses connected with those profits and a reasonable allowance for overheads (but not necessarily salary for the wrongdoer), together with a sum to take account of other benefits derived from those contracts.”

89.  No evidence has been adduced by the Defendant that he had incurred any expenses or overheads in making the secret profits out of the aforesaid transactions.  It seems that what the Defendant had done was simply issuing another set of invoice with different prices.  The Plaintiff also adduced no evidence to show that the Defendant had derived other benefits from those contracts on top of the secret profits.

90.  For the two sales to SHH! Creative and Tiger Communications in which Pure Creative made secret profits in the total sum of HK$213,829.00, I accept Miss Ho’s evidence and find that the Defendant is liable to account to the Plaintiff the said secret profits in the sum of HK$213,829.00.

91.  In respect of the sale to Italee Optics, it was items 19 and 20 in Schedule 1.  The secret profit made by Pure Creative in this transaction was HK$9,480.00.  The Plaintiff’s claim under the Under Price Claim for this transaction was HK$26,160.00 (see Schedule 1).  The Plaintiff opted to claim under that head for this transaction.  As pointed out by Ma J (as he then was) in Kao Lee & Yip v Koo Hoi Yan Donald & Others at paragraph 146 that: “A beneficiary who sue for breach of fiduciary duty can of course elect which remedy he wishes to pursue.”

Other Claims

92.  In Schedule 1 Miss Ho listed 56 transactions.  (Item 15 being sale to SHH! Creative is missed out in Schedule 1 as it is covered in the Secret Profit Claim)  In nine of these transactions (i.e. items 6, 8, 21, 22, 32, 43, 48, 52 and 53 of Schedule 1) there were production orders but no invoice was found. In items 1, 2, 5, 7, 9 and 44 of Schedule 1, the invoices issued did not cover the whole quantities produced.  The Plaintiff’s case is that these goods have not been invoiced (the “Uninvoiced Sale”).  In respect of goods covered by invoices issued, the invoiced prices were below the Quotation Prices (the “Under Price Sale”).

93.  Out of these 56 transactions, Pure Creative was the buyer in 32 transactions (i.e. items 3-5, 7-11, 13, 17-20, 24, 27-28, 31-38, 40-41, 45, 47-48, 50 and 52-53 of Schedule 1).

94.  I shall deal with transactions with Pure Creative and transactions with other customers of the Plaintiff separately.

95.  In Schedule 1, there are 24 transactions between the Plaintiff and its other customers.  Seventeen of which were solely Under Price Sale transactions (i.e. items 12, 14, 16, 23, 25, 26, 29, 30, 39, 42, 46, 49, 51, 54, 55, 56 and 57) and four were solely Uninvoiced Sale transactions (i.e. items 6, 21, 22 and 43).  The remaining three transactions were both Under Price Sale and Uninvoiced Sale (i.e. items 1, 2 and 44).

Under Price Claim

96.  Mr. Ho’s evidence is that he had not authorized quotation below the Quotation Price.  No evidence has been adduced to show that the Plaintiff’s customers other than Pure Creative would still place their orders with the Plaintiff at the Quotation Prices for the Under Price Sale transactions.

97.  I accept that the Under Price Sale transactions with customers other than Pure Creative were results of the Defendant’s breach of his employment contract in failing to comply with the Policy.

98.  “The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”  (Per Parke, B. in Robinson v Harman [1848] 1 Exch. 850 at 855)

99.  If the Defendant had not breached the Policy and had submitted quotations to customers in accordance with the Formula, the Plaintiff might not get these businesses.  The Factory would not earn the Production Profits and the Plaintiff would not earn the Sale Profits.  However, in such case, the Plaintiff would not have incurred the Production Costs and the Disbursement Costs. The Plaintiff also would not have paid commission at 4% of the Sale Price to the Defendant for these transactions.

100.  For these transactions the Plaintiff’s loss are the Production Costs, the Disbursement Costs and commission paid to the Defendant.  However, the Plaintiff has to give credit to the Sale Prices received.  The Factory and the Plaintiff would not have earned any profit out of these transactions and their respective overheads (other than sales commission) would still be incurred in any event.  I set out in paragraphs 115 to 117 below my assessment of the Plaintiff’s loss in the Under Price Sale transactions with customers other than Pure Creative.

101.  In respect of sales to Pure Creative, these were transactions conducted by the Defendant in breach of his employment contract with the Plaintiff and in breach of his fiduciary duties owed to the Plaintiff.  When the Defendant caused the Factory to produce the goods, the Defendant knew that the Plaintiff would only agree to sell the goods at the relevant Quotation Prices.  By causing the Factory to produce the goods, the Defendant agreed to pay for the goods at the Quotation Prices.

102.  In causing the Plaintiff to invoice Pure Creative for a price below the Quotation Price, the Defendant obtained benefit through Pure Creative and was in breach of the Not to Profit Duty.  He is liable to account to the Plaintiff for such profits.

103.  The Plaintiff did not have information on whether Pure Creative had on sold these goods at a higher price.  In such cases, there was no evidence to show that the Defendant had made further profits on these transactions.  The Plaintiff was contended to claim the difference between the Quotation Prices and the Sale Prices for these transactions as its loss.

104.  According to the calculations set out in Schedule 1, the amount of loss suffered by the Plaintiff is $2,023,880.35 for these transactions with Pure Creative.  I accept Miss Ho’s calculations and find the Defendant liable to pay HK$2,023,880.35 to the Plaintiff in respect of the Under Price Sale transactions with Pure Creative.

Uninvoiced Claim

105.  For the Uninvoiced Sale transactions with the Plaintiff’s customers other than Pure Creative, the Plaintiff’s case is that the Defendant had failed to issue invoices for those goods causing loss to the Plaintiff.  However, Miss Ho’s evidence was that some of the goods produced were still kept in the Plaintiff’s warehouse and not delivered.

106.  No evidence had been adduced to show how many of the goods covered by the Uninvoiced Sale had actually been delivered to the Plaintiff’s customers. If the goods covered by the Uninvoiced Sale had not been delivered to the Plaintiff’s customers, they were not uninvoiced goods but undelivered goods.

107.  None of the Plaintiff’s witnesses could tell the Court why some goods were not delivered to the customers after production.  No documentary evidence had been adduced to explain the reasons for the non-delivery.

108.  If the non-delivery was due to breach of contract by the Plaintiff’s customers in refusing or failing to take or accept delivery, there was no breach of employment contract or fiduciary duties on the part of the Defendant and the Defendant shall not be held liable for the Plaintiff’s such loss.

109.  In short, the Plaintiff has failed to prove on balance of probabilities that the Plaintiff’s loss in respect of the Uninvoiced Sale was due to the Defendant’s breach of his employment contract or his other duties owed to the Plaintiff.  For Uninvoiced Sale transactions where no invoice was found (i.e. the aforesaid solely Uninvoiced Sale transactions), there was no evidence to show that the Defendant had obtained these businesses at prices below the Quotation Prices.  I find that the Defendant is not liable to the Uninvoiced Claim in respect of the solely Uninvoiced Sale transactions between the Plaintiff and its customers other than Pure Creative.  However, in respect of transactions which were both Under Price Sale and Uninvoiced Sale, evidence adduced shown that the Defendant obtained these businesses at prices below the Quotation Prices.  As I have ruled in the Plaintiff’s Under Price Claim, there was no evidence to show that the Plaintiff would still get these businesses at the Quotation Prices.  Hence, the loss of the Plaintiff in these transactions in respect of the Uninvoiced Claim is the Production Costs and the Disbursement Costs for the uninvoiced portion of the goods.  I assess the Plaintiff’s such loss accordingly when I assess the Plaintiff’s loss in paragraphs 115 to 117 below for the Plaintiff’s Under Price Claim.

110.  For the Uninvoiced Sale transactions with Pure Creative, these transactions were results of the Defendant’s breach of the Non-Conflict Duty and the Not to Profit Duty.

111.  If the goods had been delivered to Pure Creative and Pure Creative had not paid for them, the Defendant had obtained profits through Pure Creative and is liable to account to the Plaintiff for such profits.

112.  The Plaintiff also had no information on whether Pure Creative had on sold these goods at a higher price.  There was no evidence that the Defendant had made further profit.  The Plaintiff claimed the Quotation Price for these transactions.  I find that the Defendant is liable to pay the Plaintiff for these goods at the Quotation Price.

113.  If Pure Creative had failed or refused to take delivery of the goods produced, the Defendant is still liable to pay the Plaintiff’s loss as the Defendant had in breach of his fiduciary duties procured the Plaintiff to produce these goods.  The Plaintiff’s loss is the value of those goods at the Quotation Prices.

114.  According to the calculations set out in Schedule 1, the amount of loss suffered by the Plaintiff is $754,264.54 for these transactions with Pure Creative.  I accept Miss Ho’s calculation and assess the Plaintiff’s Uninvoiced Claim for these transactions with Pure Creative at $754,264.54.

Assessment on Non Pure Creative Transactions

115.  I accept Miss Ho’s evidence on her calculations as set out in Schedule 1 in respect of transactions with customers other than Pure Creative except that in items 12 and 42 of Schedule 1, she made mistakes in converting United States dollar figures in column “C” to Hong Kong dollar figures in column “D”.  In item 12, the Hong Kong dollar figure for converting US$0.978 at the Exchange Rate shall be HK$7.628 instead of HK$7.625 and in item 42, the Hong Kong dollar figures for converting US$0.758 and US$0.978 at the Exchange Rate shall be HK$5.912 and HK$7.628 respectively instead of HK$5.417.

116.  Based on my rulings stated in paragraphs 96 to 100 and 105 to 109 above, I set out in Schedule 2 annexed to this Decision my assessment of the loss and damages suffered by the Plaintiff in respect of transactions listed in Schedule 1 between the Plaintiff and customers other than Pure Creative.

117.  In the premises, I assess the total loss suffered by the Plaintiff in respect of the transactions set out in Schedule 2 to which the Defendant is liable to pay at $1,332,410.84.

CONCLUSION

118.  I assess that the loss and damages suffered by the Plaintiff due to the Defendant’s breach of his fiduciary duties owed to the Plaintiff in making secret profits through Pure Creative is $213,829.00.

119.  I assess that the loss and damages suffered by the Plaintiff due to the Defendant’s breach of his employment contract in failing to follow the Policy in respect of transactions with the Plaintiff’s customers other than Pure Creative is $1,332,410.84.

120.  I assess that the loss and damages suffered by the Plaintiff due to the Defendant’s breach of his fiduciary duties owed to the Plaintiff in causing the Plaintiff to sell goods to Pure Creative at a price below the Quotation Price is $2,023,880.35.

121.  I assess that the loss and damages suffered by the Plaintiff due to the Defendant’s breach of his fiduciary duties owed to the Plaintiff in causing the Plaintiff to produce goods for Pure Creative which were not invoiced or not delivered is $754,264.54.

122.  After giving credit to the sum of $600,000.00 which had been paid by the Defendant to the Plaintiff as partial compensation for the Plaintiff’s loss, the net amount payable by the Defendant to the Plaintiff is $3,724,384.73.

123.  I make an order nisi for the Defendant to pay to the Plaintiff interest on the said sum of $3,724,384.73 at judgment rate from date of Writ to the date of this Decision and thereafter also at judgment rate until payment in full.

124.  I also make a costs order nisi against the Defendant in favour of the Plaintiff for the assessment of damages proceedings.

125.  The above orders nisi shall become absolute after 14 days from the date hereof unless any party shall apply to vary the said orders nisi within this 14 days period. 

Schedule 1

Schedule 2