OVERSEAS ADVISORY INC. v. GENERAL ULTRASOUND TECHNOLOGY LTD

DCCJ 370/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 370 of 2008

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Judgment

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Introduction

1.  This is an appeal by the Defendants from an order of Master K. Lo dismissing the Defendant's application to set aside default judgment entered against them.

2.  The Writ of Summons in this action was issued on 25.01.2008. The Defendants failed to file a Notice of Intention to Defend. On 27.02.2008, judgment in default was entered against the Defendants.

3.  By Summons dated 30.05.2008, the Defendants applied to set aside the Default Judgment. The application was heard by Master K. Lo who dismissed the application on  24.09.2008.

Background

4.  The main persons in this case are Liu Kuang Lai ("Liu") and Winston Lee ("Lee"). Liu  and Lee were friends, their parents also being friends with each other in Taiwan. Liu is an engineer, and had at one stage worked for Lee for about 2-3 years until sometime in 1997.

5.  Lee had caused the 2 Defendants to be incorporated for the purpose of investing in the business of intensive ultrasound medical equipment in China.

6.  Some time in 2006 (Lee says October, Liu says July) Lee made an approach to Liu. Liu was then working as the Head of China Operations at Sonic System Inc. ("Sonic"), a large U.S.  system technology company. Lee persuaded Liu to leave Sonic to work for the Defendants.

7.   After some negotiations, the parties came to agreement. Their agreement was embodied in 2 written contracts. The first in time was an Employment Agreement, dated 01.11.2006, between the 1^st Defendant and Liu. The Employment Agreement was for a term of 3 years commencing from 01.11.2006, with a 2 month probation period. Salary was agreed to be RMB¥30,000 together with other benefits. By a Supplement to the Employment Agreement, the 1^st Defendant acknowledged that Liu had contractual obligations with his current employer which will require up to 01.03.2007 to complete.

8.  The other contract which embodied the parties' agreement was a Business Consultancy Agreement, which is the agreement upon which the current proceedings were brought. The Business Consultancy Agreement was made between the 1^st Defendant (referred to as "client"); the 2^nd Defendant (referred to as "SVO") and the Plaintiff (referred to as "Consultant").

9.  The Business Consultancy Agreement provided inter alia

(1)  In the Recital that :

"The Consultant is a specialist from Overseas Advisory Inc. in international project management"

(2)  The term of this Agreement shall be from December 1^st 2006 to November 30^th 2009 (both days inclusive)

(3)  The Consultant shall provide services on a full time and fixed period basis. The fixed period will be for a period of 3 years.

(4)  The Consultant is an officially registered business entity at the address indicated above and will abide by the governing laws of British Virgin Islands Government.

(5)  Consultancy fees shall be a total of US$13,000. per month...

(6)  The relationship of Client and the Consultant established by this Agreement is that of independent contractors and nothing contained in this Agreement shall be construed to constitute the parties as employer and employee, principle and agent, partners or otherwise.

10.  Liu duly commenced to work for the 1^st and 2^nd Defendants. However, sometime in July 2007, the Defendants terminated both the Business Consultancy Agreement and the Employment Agreement. Liu says that no reason was given for such termination. However, Liu says that payment of the consulting fee was late and was not made in full.  Further, Lee and a Philip Lee had requested Liu to reduce the consulting fee to one-third, but Liu refused.

11.  Liu, however, says that in the middle of July 2007, he was sent an email by Rex Hou, the  superior of Liu. The email was dated 02.07.2007 and on the face of it was supposed to also have been sent to Lee. The email reads :

"August 9 is my last day at Sonic as the Director of Asia Pacific Operations. I am obligated to spend the last week in Taipei to say good bye to my staff and to hand over company assets. Additionally, I need to take 2 weekends before August 9 to visit my clients in HK and Singapore to say good bye and to transition them to the new account manager(s)...."

Upon learning of this email, Lee terminated the Business Consultancy Agreement, taking the view that as Liu continued to work for Sonic for some 8 months after signing the Business Consultancy Agreement, the Plaintiff had breached the same.

12.  Lee also says that the consulting fees had been paid in full, part in cash.

13.  Each side alleges that the Employment Agreement has been breached by the other. However, as there is an arbitration clause, this was not pursued in the current action.

Applicable Principles

14.  .The judgment in default was a regular judgment. There is no dispute as to the applicable principles. It is a matter of discretion and all the circumstances must be taken into account. However, the authorities suggest that the single most important factor is whether there is a defence on the merits. The burden is on the defendant. In Premier Fashion Wears Ltd. v. Chow Cheuk Man,¹ Godfrey J. said :

"for the purposes of 0.13, r.9 it is generally not sufficient for a defendant merely to show an arguable defence, although that alone would justify leave to defend being given under 0.14. A defendant who seeks to set aside a regular judgment must at least show that his case has a real prospect of success. To do so he must satisfy the court that his case, and the evidence he has adduced in support of it, carries some degree of conviction. It seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success."

15.  The Court must form a provisional view of the probable outcome of the action.² However, where the ultimate outcome would depend on whose evidence is believed and no provisional view of the probable outcome of the action can be formed without a trial, the appropriate test to determine whether the defendant has a real prospect of success is whether the defence "could well be established" at trial.³

The Issues

16.  Much of the background is not in dispute. The issues are :

(1)  was the consultancy fee paid in full up to the date of termination of the Business Consultancy Agreement?;

(2)  what is meant by the requirement in the Business Consultancy Agreement that "the Consultant shall provide  services on a full time and fixed period basis";

(3)  was the Plaintiff in breach.

bearing in mind that the burden is on the Defendants to adduce potentially credible evidence carrying some degree of conviction.

Consultancy Fee Paid In Full

17.  The matter was raised by the Plaintiff in the pleadings and the affirmation of Liu. It was therefore incumbent on the Defendants to show that the Plaintiff had been paid in full. However, the best that the Defendants could do was to provide evidence of 2 payments, one of US$26,000 and the other of US$44,000. Lee in his 2^nd Affirmation filed on 30.07.2008 stated that part of the consulting fee was paid in cash. However, no particulars were given, and no application was made to adduce any further evidence on these payments.

18.  It is trite law that the mere assertion in an affidavit of a given situation does not, ipso facto provide leave to defend in an application for summary judgment. The same observation applies, a fortiori, where a defendant seeks to set aside a regular judgment in default.

19.  Even if payments had been made in cash, there would have been some record made of the cash payments. After all, the consultancy fees are not minor sums which would have been disbursed as petty cash. The Defendant has not provided any evidence to support this assertion, nor any explanation why such evidence is lacking. The Defendant has even failed to give any particulars as to what amounts were paid in cash, and when.

20.  In the circumstances, I find that the Defendants have failed to adduce credible evidence carrying a degree of conviction that the Plaintiff had prior to 01.07.2006 been paid its consultancy fees in full.

Construction of the Business Consultancy Agreement

21.  The Business Consultancy Agreement provides that the Consultant (ie the Plaintiff) is an officially registered business entity, and is clearly identified as a corporate entity. The allegation that Liu was often not at the 1^st Defendant's offices in Beijing or was still working for his previous employers during the currency of the Business Consultancy Agreement would on the face of it not be relevant to any alleged breach thereof.

22.  However, Mr. Yee for the Defendants puts his argument this way : The Business Consultancy Agreement and the Employment Agreement must be looked at together. Further, the Business Consultancy Agreement provides that "The Consultant is a specialist from Overseas Advisory Inc. (ie the Plaintiff) in international project management". This would make no sense, since Overseas Advisory Inc. had been defined to be the Consultant. Therefore, the parties must have intended that the word "Consultant" bear 2 meanings, one being the corporate entity of the Plaintiff, and the 2^nd being the person of Liu, who was the one that the parties were all agreed would be providing the actual consultancy services. This is supported also by certain provisions in the Business Consultancy Agreement where the Consultant must in the context refer to a real person. Thus, any failure by Liu to devote his full time to the 1^st Defendant would be a breach of the Business Consultancy Agreement.

23.  I reject this argument. Firstly, the description of the Consultant being a specialist from Overseas Advisory Inc. is contained in the recital. It is clear in the operative part of the Business Consultancy Agreement that Overseas Advisory Inc was the Consultant. Although a recital may be used as an aid to the construction of a contract, where the words of the operative part of the contract are clear, they will not be controlled, cut down or qualified by the words of a recital.

24.  More importantly, in construing the Business Consultancy Agreement, the 'matrix of fact' or background knowledge reasonably available to the parties must be taken into account. Of particular importance in the present case is that the parties who are commercial men deliberately structured their relationship to be governed by an agreement personal to Liu (the Employment Agreement) and an agreement with a corporate entity (the Business Consultancy Agreement). The agreements are not simply mirror images of each other, but are different in many respects. 

25.  Insofar as any obligations personal to Liu are concerned, they were and are found in the Employment Agreement. If it was intended that the Business Consultancy Agreement should contain obligations personal to Liu, it would have been simple to provide for that. The silence of the Business Consultancy Agreement, in the contextual background of this case, speaks volumes.

26.  I find that the Business Consultancy Agreement cannot bear the construction contended for by the Defendants.

Was The Plaintiff in Breach

27.  Even if the Business Consultancy Agreement could be construed as imparting some personal obligations on Liu, I am not convinced that the Defendants have adduced evidence carrying some degree of conviction.

28.  Two matters are relied on by the Defendants. Firstly, an assertion that Liu only attended the Defendants' Beijing office occasionally, and secondly the email from Liu.

29.  On the assertion that Liu only attended the Defendants' Beijing office occasionally, there is no evidence of any prior complaint as would have been expected. There are no office memos or emails, or indeed evidence of any queries made.

30.  Lee sought to support his argument in this regard by reference to what was described as "attendance records". However, on examination, they are none of the kind. They are merely records of the time when Liu's staff card was swiped upon entry to the production department of the 1^st Defendant. Liu explained that senior management (of which Liu was one) were not required to swipe their staff cards, but that he did so when in the presence of junior staff to set a good example. This is reasonable and was not disputed by Lee in his 2^nd Affirmation.

31.  As to the allegation that Liu continued to work for Sonic beyond March 2007, Liu explained that although his last day as an employee was 09.08.2007, he had not had any job duties with Sonic since 01.03.2007. I see nothing inherently incredible in this explanation. The fact that Liu saw fit to send this email to his superior Rex Hou, as well as Lee (although Lee denies having received it) as well as having it copied to others within the 1^st Defendant shows that Liu was not attempting to hide anything. This is more consistent with Liu's conduct not being in breach of his Employment Agreement and therefore devoting his full time to the 1^st Defendant's business.

32.  Although this may be an arguable defence on the test to be applied in summary judgment applications, I am not convinced that it is a defence which has a real prospect.

Conclusion

33.  I am of the view that in all the circumstances of the case, the Defendants have failed to satisfy me that they have a defence on the merits with a real prospect of success. Accordingly, the Defendants' appeal is dismissed.

34.  I make an order nisi that the costs of this appeal be to the Plaintiff to be taxed if not agreed, with a certificate for counsel.