CAESAR'S EMPIRE KARAOKE (a firm) v. LAM CHUEN IP AND OTHERS

HCA4594/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4594 OF 2003

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J U D G M E N T

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1. There are two summonses taken out by the plaintiff. That dated 15 January 2004 is for an injunction to restrain the 2nd, 4th, 6th, 7th, 11th, 13th, 19th, 22nd to 27th and 29th defendants from working for a competitor, Star Champion Holdings Ltd trading as New Star and River Night Club, or any other establishment where alcoholic beverages are served before the expiry of their fixed term contracts with the plaintiff, or the trial of the action. That dated 21 January 2004 is under Order 14 of the Rules of the High Court for a final injunction against the same defendants in the same terms; for summary judgment against each of the defendants for payment of money lent by the plaintiff; in the alternative, for a determination under Order 14A that the 5th, 10th, 14th, 18th and 28th defendants' fixed term contracts with the plaintiff were entire contracts and in the event that the answer is in the positive, for judgment against each of them for sums which, according to the plaintiff, were paid to them in consideration of their working out the full term; and still alternatively, against each of the defendants for interim payments.

2. In fact it appears now that the 9th, 17th, 20th and 21st defendants have returned to work with the plaintiff, and the 3rd defendant has come to terms with it. The plaintiff does not now seek judgment against these defendants.

3. The plaintiff is a karaoke night club operator. It is a partnership. The 1st defendant was formerly a shareholder in one Dadol Ltd which was a shareholder in another company which was one of the partners in the plaintiff. The plaintiff's pleaded case is that all the defendants were employed as public relations managers in the plaintiff's night club. They in turn engaged the services of "public relations hostesses" to entertain the customers there.

4. The plaintiff's claim against all but five of the defendants is based on fixed term contracts of one or two years' duration. The other five are said to have been engaged on monthly or half-monthly terms after the expiry of their fixed term contracts. I reproduce here the translation of one such fixed term contract. It is a form, printed in Chinese, and the name written in manuscript is that of the 2nd defendant. There are two illegible signatures. The date is given as June 2003 but no day is specified. The figure of damages of $300,000.00 is written in manuscript Chinese characters and not figures.

"I, YEUNG LAI PING alias PINK, holder of Hong Kong Identity Card No.:

XXXXXXX(X), had been engaged by your Company from 15th June 2003 to provide services for a period of 12 months until 16th June 2004. The standard working time is set at 26 days per month and will be counted by actual working day.

I also agree to abide by the rules of the Company strictly during my service period, and I shall not invest, or provide my service either full-time or part-time to any other establishment where alcoholic beverages are served. If I am in breach hereof, I agree to pay your Company a sum of HK$300,000.00 for compensation without any conditions.

I also agree that I would absolutely obey any arrangement made by the Company that I shall provide services at other companies in the same organization as the Company without objection.

I hereby execute this Agreement to confirm."

5. In each case the plaintiff also claims that a premium or key money was paid to the defendant on signing the contract and that this key money was paid in consideration of the defendant completing the full term of the contract.

6. There is a sordid background to this case. In about May 2003 the 1st defendant, for her part in entertaining a senior superintendent of police, Sin Kam Wah, was charged with three counts of Exercising Control over Persons with a View to their Prostitution, and three counts of Offering an Advantage to a Government Servant. Sin Kam Wah was charged with three counts of Misconduct in Public Office. They were tried before H.H. Judge Saunders in the District Court, in November 2003. Both were convicted on 28 November 2003 and were later sent to prison for three years.

7. The plaintiff pleads that the 1st defendant was charged with offences and requested the partners of the plaintiff to pay for her defence, which they refused. It is said that in entertaining Sin Kam Wah she was acting in her private and personal capacity and promoting her own interest. Following her conviction, the other defendants ceased to report for duty and they later confirmed to the plaintiff that they had agreed and conspired with the 1st defendant to do this.

8. The plaintiff further pleads that in further breach of contract, the 2nd to 29th defendants, except the 3rd, 12th, 15th and 16th defendants on 10 December 2003 went to work for New Star and River Night Club, a rival business of the plaintiff where alcoholic beverages are served, and in which the 1st defendant has an interest. They took with them about a third of the hostesses employed in the plaintiff's business, as a result of which the plaintiff's business dropped by about one-third.

9. The plaintiff says that the defendants wrongfully repudiated their contracts for service with it. It accepted the repudiations on the part of the 5th, 8th, 10th, 14th, 18th and 28th defendants and claims back the key money paid to them. It also claims for repayment of unsecured loans which were to be repaid from remuneration. It claims damages for conspiracy and for breach of contract against all defendants. Different sums are claimed against each defendant, in a schedule to the Amended Statement of Claim, in respect of the loans.

10. The plaintiff's claims for interlocutory injunctions are supported by affirmation evidence of its manager Mr Siu Shing Luen. He affirms that the 2nd, 4th to 8th, 10th, 11th, 13th, 14th, 18th 19th and 22nd to 29th defendants all stopped reporting for duty after the verdict of H.H. Judge Saunders was given on 28 November 2003. In fact 27 of the defendants on 1 December 2003 signed "Joint Declarations" in these terms :

"Because one small partner Lam Chuen Ip (Yuen Wah) of Caesar's Empire Karaoke has been convicted by District Court for three counts of controlling prostitutes; the trial Judge also in his Judgment confirmed that the present manner of trading by Caesar's Empire Karaoke is illegal. In view of this, from today, I and those public relations girls will not return to work at Caesar's Empire Karaoke. If there is any claim, please pursue by way of legal proceedings, otherwise to report to police to handle."

11. Mr Siu says that the defendants told him that the 1st defendant had asked them to cease providing their services to the plaintiff on her conviction. From 10 December 2003, the defendants all went off to work for the New Star and River Night Club, a competitor; and they took their hostesses with them. In all one third of the hostesses left. So the plaintiff lost a lot about a third of its business.

12. In a second affirmation, in support of the Order 14 summons Mr Siu produces copy cheques in support of the payment of key money and a sheaf of pay packet records showing the running totals of the financial positions of the defendants. Some of them are signed by the defendants themselves, some by persons said to represent them.

13. In a third affirmation, filed in reply to those of the defendants Mr Siu says that in spite of their evidence that if an injunction is granted they will not be able to work elsewhere, they can in fact work for other establishments which are members of the Federation of Hong Kong and Kowloon Ballroom and Nightclub Merchants. This Federation of which the plaintiff is a member but the New Star and River Night Club is not, has a rule that when a public relations manager or hostess changes from one establishment to another the new establishment is responsible to settle all his or her responsibilities to the old establishment. This is a frequent occurrence in the trade. The rule is always honoured and there is very little dispute.

14. Another night club manager, Mr Cheng Pak Nin, has filed an affirmation giving confirmatory evidence of this Federation and its rule on transfers. Also the plaintiff has put in an affirmation by the 20th defendant who has apparently been "turned". She now says that the 1st defendant put the others up to leaving, because the plaintiff would not pay for her defence in the criminal case. She herself registered with the competitor but did not actually work there, and later having been served with the writ, returned to work for the plaintiff. She also confirms her understanding of the Federation and its rule on transfers.

15. Various defendants filed affirmations in opposition to the summons for interlocutory injunction. They all say more or less the same thing, namely that the contract is not binding, either because when it was signed it contained no provision for damages, or in the case of the 6th defendant that it was not signed at all. They were providing services to the defendant as independent contractors. But if the injunction is granted they will be forced to work for the plaintiff or remain unemployed, for they have no other skills.

16. In opposition to the Order 14 summons the 1st defendant gives evidence about the operation of night clubs including the plaintiff. The hostesses move between the clubs; they are supervised by mamasans and those in turn are supervised by managers such as herself and the other defendants. All are self employed. Some managers are engaged on a fixed term basis. When a manager or mamasan is engaged she is paid key money to induce her to join the night club and bring her hostesses with her. In some cases it is non-refundable. In others it is paid to secure the manager or mamasan to remain for the full term of employment.

17. In this case, says the 1st defendant, all the other defendants were engaged by her, in her personal capacity and not by the plaintiff. She was entitled to direct them to work elsewhere and to ask them to follow her to another establishment. As regards loans the plaintiff should not claim against the other defendants because the mutual understanding and the customary practice of the trade was that the plaintiff would go after her for any outstanding money incurred by the others when working at the plaintiff's nightclub.

18. She was paid money herself by way of advances of $200,000.00 in 2002 and 2003, but these payments were intended to induce her to stay and work in the plaintiff after she had given up her shareholding in Dadol Ltd in October 2003.

19. The evidence of the others is again more or less the same in each case. In brief it is that they were recruited by the 1st defendant; liability for loans is denied but it is said that in any event any loans made were owed to the 1st defendant and not the plaintiff; and where key money was paid it was a signing bonus and not refundable.

20. I will deal first with the Order 14 application and the alternative remedies sought. Under Order 14 a defendant can obtain leave to defend if he satisfies the court that "that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial".

21. The threshold onus is on the defendant to show that there is a triable issue. But that threshold is not high. Per Godfrey JA in Man Earn Limited v. Wing Ting Fong [1996] 1 HKC 225 :

"Unless it is obvious that the defence put forward by the defendant is 'frivolous and practically moonshine', Order 14 ought not to be applied": see Codd v. Delap (1905) 92 LT 510 per Lord Lindley at 511.

22. The defendant's allegations are to be viewed against the background facts. Per Bokhary JA (as he then was) in Re Safe Rich Industries Limited, Civil Appeal No.81 of 1994, unreported, 3 November 1994 :

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

23. The potential triable issues which appear in the affirmation evidence of the defendants are :

(1) Whether the defendants worked for the plaintiff or the 1st defendant;

(2) Whether they owed money to the plaintiff or the 1st defendant;

(3) Whether the 1st defendant owed money to the plaintiff, or was simply paid it to secure her continued services;

(4) Where key money is claimed, was it paid to secure complete performance, or simply as a non-refundable signing-on fee;

(5) Whether those defendants against whom injunction is sought would be forced thereby to work for the plaintiff, and

(6) In respect of the 6th defendant, the authenticity of the contract.

24. In addition Mr Marshall SC, for the defendants, argues that the evidence is incomplete, apart from being wholly disputed. The contracts do not show the whole picture; they are rather fragments of contracts. The exhibits showing apparent indebtedness come from a complex accounting system involving various set-offs, and justice can only be done by the ordering of an account to be taken at trial and adjudication on all payments in dispute.

25. Further Mr Marshall argues that the contracts may be illegal, and therefore unenforceable, as being either contracts to commit crime or contracts involving sexual immorality. Reference is made to the District Court trial of the 1st defendant and the Reasons for Verdict given by H.H. Judge Saunders. Mr Bell, for the plaintiff, points out that no defence has yet been filed, and this point is not taken in the defendants' affirmations; they do not say that the contracts are unenforceable for this reason. However there is obviously some dispute as to whether the defendants pulled out because of a conspiracy headed by the 1st defendant or because, having realised what the judge said in the criminal case, they felt unsafe to continue working. The potential question of illegality is one which in my view could amount to "some other reason for trial". I will come back to this point later.

26. On the related questions of whether the defendants worked for the plaintiff or the 1st defendant it is noted that the contracts do not identify "the company". Of course it is argued that "the company" must have been the plaintiff. But the plaintiff is not a company, it is a partnership. At least one of the partners was a company, it appears. Of course if the contracts were with the 1st defendant, she was admittedly a partner in the plaintiff business and so would be accountable to it as such. Further, bare denials of indebtedness are not sufficient to raise a triable issue for Order 14.

27. It is certainly arguable that there is not much in this point. However it is not one which can simply be disregarded especially given the tendency of many business people to perform a kind of "dance of the corporate veils" and duck and dive behind the corporate veil of whichever of their companies best suits their purposes at any given time. Further, if defendants consistently say that when they signed the paper, it was incomplete, and in one case that it was not signed at all, it seems to me that this is a matter which calls for investigation. So it seems to me that there is a triable issue here but if there is not there is certainly something which calls for investigation and that is a reason for trial.

28. On the question whether the 1st defendant owed money to the plaintiff, or was simply paid it to secure her continued services, the plaintiff has produced a promissory note for $400,000.00 which Mr Siu says she signed, so at the end of the day she probably has no defence. However this is produced by way of reply. We do not have her evidence on it at this stage.

29. It seems to me that the question of whether key money was paid as a non-refundable signing-on fee must be a triable issue. It is all very well to say that it must be a payment to secure full performance, as a matter of common sense but I do not see that this is necessarily so. Further, it all goes with the fragmentary nature of the written agreements. There is nothing in them about key money. The 1st defendant's evidence suggests that in some cases it was repayable and in some cases not. It seems to me that this can only be decided by hearing the evidence in any given case. The same goes for any question of authenticity of any of the contracts.

30. The question of enforceability of the contracts is an interesting one. The objection to it is that the courts will not grant an injunction if its result will be to bind a person to a particular contract of employment or for services, for that would be specific performance by an indirect route. However the plaintiff relies on a long line of cases culminating in Warren v. Mendy & Anor [1989] 1 WLR 853, which decided that where a contract for personal services involved the exercise of some special skill or talent and a high degree of mutual trust and confidence, the court will not enforce negative stipulations if to do so would effectively compel performance of the positive stipulations; but this does not apply where the person against whom enforcement is sought can get other work or contract his services to others.

31. Here, of course, there is no particular skill or talent involved and no particular mutual trust and confidence between the parties. There is evidence that the defendants could, if prevented from working where they now work, go and work for any of the other 50 or so members of the Federation.

32. This is all very well, but the fact that this Federation is now being prayed in aid highlights the fragmentary nature of the contracts and raises the question whether they mean what they say. If this evidence is true, the prohibition against working in any other establishment where alcoholic beverages does not mean what it says. Again I think it is necessary to hear evidence before deciding just what the terms of the agreements were.

33. The question also arises whether, even so, the effect of the injunction would not still be to drive the defendants back to work for the plaintiff. There is no evidence as to the actual prospects of work being offered by Federation members. If the plaintiff is prepared not to seek enforcement so long as the defendants work for Federation members, in spite of what it has written on the contract form, one can reasonably ask, apart from the prospect of the new employer taken over any debts owed, is there any other form of control involved; for instance a blacklist?

34. It seems to me therefore that there are triable issues on all the points raised. The defendants' cases have varying degrees of strength in them but it is impossible to dismiss them as "frivolous or practically moonshine".

35. In argument Mr Marshall SC, for the defendants, referred to the learned judge's Reasons for Sentence. I also called for a copy of his Reasons for Verdict. In the course of those Reasons he found inter alia that the 1st defendant was associated with a number of night clubs or karaoke lounges, including the plaintiff. The primary function of these establishments was the provision to customers of sexual services by hostesses, euphemistically styled "public relations officers".

36. The learned judge accepted the evidence of five hostesses. I reproduce here Paragraph 14 and part of Paragraph 15 of his Reasons :

"All five hostesses said that as part of their duties they were employed as sex workers. They were given a number and allocated to a mamasan who acted in the capacity of a manager of a group of hostesses. The club charged for their time with a customer in the club and if a customer wished to take them out for dinner or sex the club charged the customer for that time. The hostess charged the customer for sex services and on returning to the club paid a percentage of that sum to the mamasan to which they were assigned. The customer could, if they wished, pay for sexual services by credit card to the club, with the hostess collecting her share, and paying the cut to the mamasan on return to the club.

Evidence from a clerk at the Dadol Hotel established that arrangements had been made between three of the clubs, Paris by Night, Domus Club and Caesar's Empire Karaoke that when a hostess from those clubs took a customer to the hotel for sex services the hostess would give her hostess number to the hotel, which checked with the club to confirm the number, and the room charge was made to the club, who had paid, on a monthly basis, in advance, for the rooms."

37. What the judge found was, in effect that the mamasans were living off immoral earnings by taking a cut of the payment for sexual services and that the whole business was subject to institutional control in the club and the related hotel. It is true that the evidence related to a small number of hostesses and mamasans some time ago. It would not necessarily follow that the defendants, who were either mamasans or the managers of mamasans, were in the same position. The plaintiff could have cleaned up its act. This is so, though there is no recorded instance so far of a leopard changing its spots.

38. I accept that there is only suspicion that the defendants had contracted to undertake services which were criminal, in that they involved the control of and taking money from prostitution, or were for the same reason contra bonos mores. But the question arises whether this suspicion is sufficient to provide "some other reason for trial". This may be invoked even where the defendant has no arguable defence to the claim, but there is a transaction which ought to be scrutinised with some care. See the observations of Megarry J in Miles v. Bull [1969 1 QB 258 at 265C :

"Accordingly, if the question is whether or not the defendant has an arguable defence to the claim, I would have to answer no : for as matters stand I can perceive no such defence. All that can be said is that this is a transaction which ought to be scrutinised with some care; for plainly it bears something of the appearance of a device to evict the defendant. A device may, indeed, be a perfectly genuine transaction and no sham: that it was devised for a particular purpose by no means necessarily implies that it pretends to be what it is not. However, if a transaction is carried through not for its own sake, but in order to achieve some ulterior purpose, it may be found on examination that it has travelled the road from artifice and artificiality to sham.

39. It seems to me that the position is the same here. The suspicion that a transaction is tainted with illegality, as with the suspicion that it is a sham, gives rise to the need to examine the transaction closely. The need for trial therefore arises even if the defendants have no defence or at best a sketchy defence. The same applies on some of the points considered above such as the true effect of the contract and the real effect of the plaintiff's being prepared to let the defendants work for Federation members.

40. I am satisfied that Order 14 for final injunction or for payment is inappropriate here, for all the reasons given above. I do not see that a determination under Order 14A is appropriate either; given the fragmentary nature of the contracts they need to be scrutinised and evidence heard before any decision can be made on them.

41. Interim payments are sought. They may be granted under Order 29, rule 11 where the court is satisfied that if the action proceeds to trial the plaintiff will obtain substantial damages. In that case the court may, if it thinks fit, order a payment of such amount as it thinks just. I do not see that, in the light of what I have said above, I can be satisfied at this stage that the plaintiff will obtain substantial damages. Even if it would I do not think interim payments at this stage would be just. The plaintiff is no doubt a large organisation. The defendants are individuals. The plaintiff can wait until trial for its money, if it is to get any. To try to make the defendants disgorge any of it at this stage would simply be to harass them.

42. Indeed given the background of this case another question which obviously arises is whether the plaintiff is seeking to protect its true interests, or simply to punish the defendants for leaving it. The fact of a large concern seeking interim payments from individuals who say they have families to support would support this suspicion. It too would provide another reason for trial. See above.

43. I turn to the question of interlocutory injunctions. The question is whether there is a serious question to be tried, whether the plaintiff can be adequately compensated in damages if the injunction is not granted, and where the balance of convenience lies. See American Cyanamid Co. v. Ethicon Ltd [1975] AC 396. The last consideration may be seen as the balance of risk of injustice.

44. There is no doubt a serious question to be tried. However just what the plaintiff is losing, because the defendants are now working for a competitor, and what it stands to lose, is not clear. There is evidence that, in the beginning at any rate, it lost a third of its business. But later evidence relating to the Federation suggests that the movement of hostesses and mamasans between establishments such as that of the plaintiff is commonplace. It is not unreasonable to suppose, therefore, that the plaintiff has been in a position readily to recruit new personnel. This goes first to the question of whether it can be adequately compensated in damages if the injunction is not granted. On the face of it the loss is pecuniary. If the defendants able to pay any damages awarded, the plaintiff could be adequately compensated by them. It also goes to the question of the balance of convenience. If the plaintiff has been able to recruit others, there may be no continuing loss caused by the defendants' continuing to work for the competitor. The defendants would certainly have to go and work somewhere else if they were prevented from doing so. If they could get work with Federation members, well and good. If not, they would no doubt have to seek menial work; if they have been working in the night club industry for many years, as it seems they have, they will not be good for much else. In any event the risk of injustice to the defendants is greater than the risk of injustice to the plaintiff.

45. On the Order 14 summons the defendants will have unconditional leave to defend. Costs (nisi) in the cause. The plaintiff's summons for interlocutory injunction is dismissed with costs (nisi) to the defendants (except the 3rd, 9th, 17th, 20th and 21st defendants who were not represented and took no part in the proceedings) in any event.