PROMO INTERNATIONAL LTD v. CHAE MAN TOCK AND ANOTHER

HCA 1337/2010

[2018] HKCFI 284

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1337 OF 2010

________________________

_______________________

_________________

J U D G M E N T

_________________

Introduction

1.  This action commenced over 7 years ago and in the action, the plaintiff (“P”) is essentially seeking damages against the defendants, who were alleged to be P’s former employees and beneficiaries of secret commissions and inflated prices of P’s products manufactured in Mainland China.

2.  The 2^nd defendant (“D2”) is the wife of the 1^st defendant (“D1”) and they have counterclaimed against P for alleged agreed expenses of P’s Hong Kong office (D1 and D2 collectively referred herein as “Ds”).

3.  There was initially a 3^rd defendant Daniel Yeung Hoi Fun (“Yeung”) whom P no longer claimed against.

4.  The main issues at the trial before this court were :

(i)   whether Ds were P’s employees at the material times;

(ii)   If yes, then whether Ds were in breach of their duties owed towards P;

(iii)   If yes, the extent of damages suffered by P arising out of Ds’ breach of duties.

5.  Ds were separately represented at the commencement of the action, but in 2015, they respectively filed notices to act in person. Counsel Mr Richard Leung appeared for P at the trial.

Background

6.  P is a company incorporated under the laws of the United Kingdom in December 2003 and trades under the name of “Olympicpromo International Limited” or Olympicpromo.

7.  P was set up by Mr Peter John Townsend and his wife Mrs Lynda Gillian Townsend as shareholders, with Mr Townsend as its Managing Director.  P carries on the business of supplying products such as baseball caps, waiter trays, plastic pitchers, menu folders and bottle opener to customers in UK and the European Union for business promotional purposes. 

8.  The business was first set up in 1987 by Mr Townsend under a UK company called Olympic Promotional Watches Company Limited which at that time was mainly producing and supplying watches for customers for business promotional purposes, but later when the products expanded to other items, P was set up and took over the assets and liabilities of the earlier company.

9.  At all the material times, P did not have production lines and its products were mainly sourced from suppliers in Hong Kong and/or Mainland China. 

10.  According to Mr Townsend, he also set up a company called Pacific Premiums Limited in Hong Kong in around 2002 to further explore his business network (“Pacific Premiums”).  As seen in its March 2008 annual return, at that time there were 2 corporate nominee shareholders of Pacific Premiums and 2 directors by the surname of “Kwong” and who according to D1 are brothers.  One of the Kwong brothers, Kwong Chung Wai (“Mr Kwong”), is a friend of Mr Townsend and was the principal supplier for P in the 1990s for watches.  

11.  In 2003, a “buying office” was set up by P in Shenzhen 2003 to source the manufacture of products for P.  According to D1, the legal entity  was  called “Olympicpromo SZ Representative office”[1], which was registered in Shenzhen (“Shenzhen  Office”). There were about 6-8 employees and the General Manager of the Shenzhen Office was one Brenda Chang (“Brenda”), a friend of Mr Kwong’s.

12.  It was P’s case that:

(i)   From about 6 April 2006 to 30 April 2007, D1 was employed by P under a contract of employment dated 6 April 2006 as a senior merchandiser working in the Shenzhen Office (“1^st Period”);

(ii)   From about May 2007 onwards to 16 August 2010, D1 continued to be employed by P but worked in its buying office in Hong Kong (“Hong Kong Office”), as Office Manager pursuant to an oral agreement made between the parties (“2^nd Period”).

13.  There was no real dispute by D1 that he was employed by P to work in the Shenzhen Office as a merchandiser as pleaded by P during the 1^st Period.

14.  Brenda tendered her resignation sometime in about January/February 2007.  D1 said he was at that time visiting P’s UK office and it was D1’s case that the night before he left UK to return to Hong Kong, he and Mr Townsend reached an oral agreement (“Oral Agreement”).

15.  Briefly at this stage, it was D1’s pleaded case that as part of the Oral Agreement, when the Hong Kong Office was set up, he was no longer an employee of P’s but worked in the Hong Kong Office as an independent contractor[2].

16.  On the other hand, P’s case was that D1 continued to be employed by P, as the Office Manager in the Hong Kong Office throughout the 2^nd Period.

17.  What was not disputed was that the Shenzhen Office ceased its business operations at about end of March 2007 and the Hong Kong Office was set up and commenced operations on about 2 May 2007 at an address in Sheung Shui.  There was no formal legal entity for the Hong Kong Office.

18.  According to P, the Hong Kong Office was to receive instructions from P and to aid in the sourcing of a wide range of products as well as monitoring the production process, including arranging and approving inspections of products before shipments.  Further according to P, all expenses and petty cash of the Hong Kong Office were funded by P by transferring funds into a designated bank account held in the name of D1 at the DBS Bank (Hong Kong) Limited (“Petty Cash Bank Account”).

19.  D2 was recruited by D1 and later joined the Hong Kong Office on about 1 August 2007 as a merchandiser, and Yeung, also recruited by D1, joined the Hong Kong Office on about 10 September 2010 as senior merchandiser. 

20.  Ds’ case was that D2 and Yeung were both employed by D1 as D1’s employees, but P’s case was that they were all P’s employees.

21.  According to Mr Townsend, he received a number of emails from an anonymous sender in late May 2010 informing him of D1 and D2 asking for rebates from P’s suppliers and the prices of proforma invoices were inflated before being sent to P’s office in United Kingdom (“UK Office”)[3].  He subsequently reported the matter to the Hong Kong Independent Commission Against Corruption (ICAC) in around June 2010.

22.  It was P’s case that Ds were in breach of express and implied terms of their respective contract of employment.  Ds’ employment, as well as Yeung’s, was terminated by P on 16 August 2010, the day of their arrest by ICAC.  P later issued the writ herein on 2 September 2010.

23.  As a result of P’s complaint, Ds were charged with multiple charges of fraud and other charges arising out of their conduct in the business of P during the period between 14 May 2007 to 15 August 2010 namely during the 2^nd Period.  After a trial in the District Court under DCCC 973/2011 before District Court Judge Browne (“Judge”) in June 2012 (“Criminal Trial”), D1 was convicted of 2 offences of accepting advantage and 25 joint charges of fraud and D2 was convicted of 2 offences of aiding and abetting D1 and 3 offences of herself accepting advantage and 25 joint charges of fraud with reasons for verdict given by the Judge on 6 June 2012 (“Reasons”)[4].  They were both sentenced to 3½ years, all the sentences served concurrently.  Ds later sought leave to appeal against their convictions and sentence, but by a judgment handed down in CACC 255/2012 on 12 September 2013, their applications were dismissed by the Court of Appeal (“CA Judgment”)[5].

Witnesses

24.  Mr and Mrs Townsend both attended the trial and gave evidence on behalf of P, whereas Ds gave evidence in their own defence.

The Criminal Trial

25.  As Mr Leung had pointed out at the present trial, and as pleaded in the amended statement of claim, P relied on Ds’ respective criminal convictions of bribery and fraud in its present case against Ds.

26.  In particular, P relied on the findings as set out in the Reasons (“Findings”)[6] :

(i)   D1 was employed as the manager of P’s Hong Kong Office;

(ii)   D2 was also employed by P and worked in the Hong Kong Office;

(iii)   Ds were involved in a fraudulent scheme, whereby, unknown to P, the prices in Mainland suppliers’ invoices were inflated and sent onto P, and after the payments of the inflated price had been made by P to the Mainland suppliers, Ds would contact the suppliers for the price differences to be paid to D2’s personal bank account or occasionally to D1’s personal bank account;

(iv)   in additional to inflating the prices, Ds also arranged tooling costs to be inflated and the differences paid to D2, and in respect of some of the orders, payments were made to D2 by Mainland suppliers without P’s knowledge and consent.

27.  P also relied on the CA Judgment.

28.  In Ds’ amended defence and counterclaim (“AD&C”), Ds admitted that the Judge in the Criminal Trial did make the Findings, but denied the allegations in the Findings, the propriety of the Findings and their admissibility in the present case and P’s reliance thereof[7].

29.  Mr Leung referred this court to section 62 of the Evidence Ordinance, Cap 8, which states as follows:

“62. Convictions as evidence in civil proceedings

(1) In any civil proceedings the fact that a person has been convicted of an offence by or before any court in Hong Kong shall, subject to subsection (3), be admissible in evidence for the purpose of proving, where to do so is relevant to any issue in those proceedings, that he committed that offence, whether he was so convicted upon a plea of guilty or otherwise and whether or not he is a party to the civil proceedings; but no conviction other than a subsisting one shall be admissible in evidence by virtue of this section.

(2) In any civil proceedings in which by virtue of this section a person is proved to have been convicted of an offence by or before any court in Hong Kong—

(a) he shall be taken to have committed that offence, unless the contrary is proved; and

(b) without prejudice to the reception of any other admissible evidence for the purpose of identifying the facts on which the conviction was based, the contents of any document which is admissible as evidence of the conviction, and the contents of the information, complaint, indictment or charge on which the person in question was convicted, shall be admissible in evidence for that purpose.

(3) Nothing in this section shall prejudice the operation of section 64 or any other enactment whereby a conviction or a finding of fact in any criminal proceedings is for the purposes of any other proceedings made conclusive evidence of any fact.

(4) Where in any civil proceedings the contents of any document are admissible in evidence by virtue of subsection (2), a copy of that document, or of the material part thereof, purporting to be certified or otherwise authenticated by or on behalf of the court or authority having custody of that document shall be admissible in evidence and shall be taken to be a true copy of that document or part unless the contrary is shown.

(5)   Nothing in section 8 of the Probation of Offenders Ordinance (Cap 298) (under which a conviction leading to probation or discharge is to be disregarded except as therein mentioned) shall affect the operation of this section.”

30.  Ds had served their sentences and there were no applications for further appeal from the CA Judgment.  In light of this, as submitted by Mr Leung, and which I accept, Ds’ convictions were subsisting for the purpose of section 62(1) of the Evidence Ordinance, and further Ds’ convictions were directly relevant to these proceedings[8].

31.  The effect of section 62 was to shift the usual evidential burden from P to Ds, and the burden was on Ds to prove that their criminal convictions were wrong and/or inapplicable in the circumstances.

32.  As further submitted by Mr Leung, and further as seen later in this judgment, the issue as to whether Ds were P’s employees during the 2^nd Period had really been fully canvassed at the Criminal Trial.

33.  As seen in the Reasons, and as set out later herein, the Judge in the Criminal Trial had considered those emails between P and D1 and found that the cumulative effect of these e-mails, taken in conjunction with other circumstantial evidence pointed strongly to D1 being an employee of P rather than a business partner of Mr Townsend as alleged by D1[9]. As for D2,  the Judge concluded that she was an employee of P and that D2 was well aware that P was being defrauded[10].

34.  During the appeal, Ds had challenged the Judge’s Reasons on several grounds, in particular in relation to the issue as to whether Ds were P’s employees, and that the Judge had ignored, discounted or failed to take proper account of evidence that undermined the prosecution case[11].  However, the Court of Appeal held that the Judge had considered all the evidence including those which was contradictory to the prosecution’s case and that the Judge’s finding that the D1 was an employee was “entirely apposite”[12].

35.  As to D2, there was a similar challenge to the Finding that she was an employee of the P and the Court of Appeal had held that the Finding of the Judge to be correct[13].

36.  Having considered the Reasons and CA Judgment, I accept Mr Leung’s submissions that the issue of whether Ds were employees of P had been thoroughly dealt with both at the Court of First Instance and on the appellate level.  Further, the basis on which Ds were convicted was that they were P’s employees during the 2^nd Period.

37.  Ds had however submitted that both judgments were inapplicable and/or incorrect.  I will consider Ds’ evidence hereafter. 

The 1^st Period

38.  D1 said he was employed by P on about 27 March 2006 as a purchasing manager in the Shenzhen Office and that he had attended two interviews and according to D1, he had met 3 persons during the interviews namely Mr Townsend, Mr Philip Palmer (P’s Operations Manager), and Brenda.

39.  This was not really disputed.  According to the evidence during the Criminal Trial given by Mr Palmer, he interviewed D1 at the Shenzhen Office.  Mr Townsend had also said during the Criminal Trial that he first interviewed D1 in Shenzhen with Mr Palmer, and that there was a second interview which was attended by D1 alone in Hong Kong, and that D1 started working at the Shenzhen Office the following week. 

40.  It was P’s case that there was an employment contract dated 6 April 2006 signed between D1 and P (“Employment Contract”), which was produced by the prosecution during the Criminal Trial[14].

41.  During the Criminal Trial, D1 had denied ever signing the Employment Contract.  Mr Palmer had testified during the Criminal Trial that it was a few days after D1 started work that D1 was given a copy of P’s standard form of contract to peruse with a copy of D1’s Hong Kong identity card attached to the last page of the contract, and a few days later, D1 signed it in his presence.  Further, according to Mr Palmer, either he or Brenda then photocopied the Employment Contract and a copy was brought back to UK by him and that the original was kept in the Shenzhen Office.  A year later, he handed the copy he brought back to the UK Office to P’s Human Resources Department and later the department gave a copy to him,

42.  Mr Townsend testified during the Criminal Trial that he had seen a photocopy of the Employment Contract and recognised the signature of D1.

43.  D1 had alleged during the Criminal Trial that his signature was forged.  The signature thereon was “Chae”, namely D1’s surname.  At the Criminal Trial, D1 had produced a report by a handwriting expert Dr Valery Aginsky dated 2 April 2011[15].  In the report, the expert was of the opinion that it was highly unlikely that page 13 of the Employment Contract (the signature page)[16] was a first-generation copy of the original page bearing D1’s signature[17]. The expert was further of the opinion that by comparing page 13 with the rest of the 12 pages of the Employment Contract, the drastic difference in text/letter quality evidenced that page 13 had been copied (at a comparatively low resolution) more times than the preceding 12 pages of the exhibit[18].

44.  The expert had attended the Criminal Trial to give evidence and confirmed that page 13 had a “completely different production history” from pages 1-12 of the copy of the Employment Contract[19].

45.  In any event, as seen in the Reasons, and for the reasons set out by him, the Judge attached no weight to the Employment Contract[20] and indicated that he had serious reservations about the provenance of the purported contract, and that he had treated Mr Townsend’s evidence and Mr Palmer’s evidence in relation to the Employment Contract with the greatest caution.

46.  Further, in the CA Judgment, it was observed by Lunn JA[21], as he then was, “on its face the contract referred to an ‘offer of employment’, but none was produced in evidence.  The contract did not specify the job title or salary.  Moreover, bizarrely it specified Wickford, Essex as the [D1’s] normal place of work.  Not surprisingly, the judge found[22] : “The contract itself meant little without the offer letter of employment.” ”

47.  Mr Palmer was not called to give evidence during the present trial.  No offer letter of employment to D1, as referred to in paragraph 2.1 of the Employment Contract, was produced by P for the present trial.

48.  In his witness statement, D1 maintained that he never signed any employment contract with P nor had he ever directly or indirectly come across the Employment Contract at any time or any place[23] (presumably he meant before his arrest).

49.  Further, during the Criminal Trial, D1’s evidence was that he did not know how his initial “Chae” got on to the Employment Contract and that was not the way how he signed formal documents, and claimed he never handed over his Hong Kong identity card at any time[24].

50.  During the present trial, D1 had said that during the interview when Brenda was present, she did look at his Hong Kong identity card, but she did not take a copy thereof at the time. He claimed that he had a practice that if anyone were to ask for a copy of his identity card, he would require that person to affix a chop or to write on the copy the word “copy” and to state the purpose of obtaining the same.  D1 said he truly believed that P got his signature on the Employment Agreement from the tenancy agreement he signed for renting the premises for the Hong Kong Office (“Tenancy Agreement”)[25]. On the Tenancy Agreement, D1 had signed “Chae” on behalf of Pacific Premiums, as tenant.

51.  It was not disputed by D1 that his salary was HK$29, 000 per month during the 1^st Period, plus double pay and that in addition he joined the MPF scheme, and that he was entitled to the public/labour holidays in Hong Kong.  None of these benefits were stated in the Employment Contract.

52.  It was not really disputed that the Employment Contract was the standard contract for P’s employees in the UK Office. 

53.  It was clearly so.  In fact, the provisions in the Employment Contract in relation to say, “public holidays applicable to the country”, “winter season holiday”, “Working Time Regulations 1998”, “Social Security Contributions and Benefits Act 1992” and “normal place of work” would completely not be applicable to an employee, such as D1, working in Hong Kong or in Mainland China.  

54.  Having considered the provisions in the Employment Contract, and without the “offer of employment” letter from P, I also come to the view that no weight should be attached to the Employment Contract.

55.  It was also D1’s evidence in his witness statement that at the time of employing him, Brenda had told him about his terms of employment, and had explained to D1 that P could not give him a written employment contract and hoped D1 would understand, and that he would be in the same position as Brenda, who was also a Hong Kong resident.  According to D1, this was due to the regulations imposed by the Mainland China labour laws [26]. D1 said as he regarded the terms of employment including the salary as acceptable, and since P would be filing the tax returns for him and would be paying contributions towards the MPF scheme, he decided that it would not be a problem and accepted the job.

56.  It was thus D1’s case that there was never a written employment contract entered into between P and Brenda either, since he said the two of them were in the same situation. 

57.  However, Mr Townsend’s evidence during the present trial was that Brenda was employed by P prior to the setting up of the Shenzhen Office, and that there was an employment contract signed by Brenda with either P or Pacific Premiums. 

58.  Brenda was not called to give evidence by either side, nor was a copy of her employment contract ever produced to this Court, even after the matter was raised by D1 during his cross examination of Mr Townsend. Mr Townsend had said a copy of Brenda’s contract was given to ICAC but there was no record of such a document being produced as seen from the Judge’s summary of evidence in the Reasons.

59.  Mr Townsend’s evidence was that he believed that the employment terms for both Brenda and D1 were the same, in that P did report salaries tax for them in Hong Kong, and had further registered them under the MPF Scheme and there was also double pay for them during Chinese New Year. 

60.  As said earlier, it would appear from Mr Townsend’s own evidence during the Criminal Trial that D1 had started work in the Shenzhen Office before signing the Employment Contract or any written contract[27].

61.  Since no weight was to be given to the Employment Contract, and no offer letter of employment, or any other written agreement or contract of employment had been produced by P, I am prepared to accept D1’s evidence that he was initially employed by P upon accepting terms orally conveyed to him by P.  On his own admission, he was employed by P during the 1^st Period as a “merchandising manager” in the Shenzhen Office[28]. 

The Oral Agreement

When was the Oral Agreement alleged to be reached

62.  In D1’s witness statement, the Oral Agreement alleged by him was said by him to be reached between him and Mr Townsend on the night before his return to Hong Kong from UK after a two week stay, and that this was in about January 2007.

63.  What was not disputed by P was that there was a new arrangement implemented in relation to the payments to D1 upon the setting up of the Hong Kong Office, namely that the payments made to D1 by reason of his employment would be paid in GBP, and that P would not be making contribution towards D1’s MPF in Hong Kong, and further P would not be filing salaries tax returns for D1 in Hong Kong (“New Arrangement”).  

64.  Mr Townsend was in Hong Kong from about 16 April to 3 May 2007.  The Hong Kong Office was opened on 2 May 2007.  According to Mr Townsend, the New Arrangement was effected at the request of D1 during the period when Mr Townsend was in Hong Kong.  

65.  During the Criminal Trial, there was a letter dated 4 May 2007 produced by the prosecution (Exhibit P10) which was a letter said to be sent by Mr Townsend to D1 (“04.05.07 Letter”)[29].  The letter indicated that for tax purposes, D1 had wanted to change from being paid in HKD to being paid in GBP by P, with D1 making his own MPF contributions and his own tax declarations.

66.  The 04.05.07 Letter was also a document which D1 had alleged to be forged during the Criminal Trial, or rather his case was really that the letter did not exist, as he never received such a letter.  The handwriting expert was of the opinion that prior to the latest process of copying to prepare copies for his examination, the copy of the 04.05.07 Letter had a different production history (that included the initial printing and/or subsequent copying processes) from the first 12 pages or page 13 of the copy of the Employment Contract[30]. However, this would not really assist D1’s case.

67.  As with the copy of the Employment Contract, the Judge in the Criminal Trial had set out the evidence in respect of the 05.04.07 Letter and in the end attached no weight to the letter as he had serious reservation as to the provenance of the prosecution evidence[31].

68.  During the present trial, D1 had cross examined Mr Townsend on how he sent the 05.04.07 Letter to D1. Mr Townsend’s response was he arrived back in UK from Hong Kong early on 4 May 2007, which was a Friday.  He then went to his office and dictated the letter to formalize the arrangement agreed between him and D1.  Mr Townsend said it was sent in a parcel by courier as every Friday P would send by courier a parcel to Hong Kong and that the Hong Kong Office would similarly send a parcel to UK Office by courier.  Mr Townsend had also said that he and D1 had discussed regarding the New Arrangement during the period in Hong Kong and that the 05.04.07 Letter was a confirmation of the agreed New Arrangement.  It was Mr Townsend’s evidence also said that he did not expect D1 to countersign on the letter. 

69.  There was no email sent to D1 attaching a copy of the 05.04.07 Letter.

70.  It was put to Mr Townsend by D1 that the then practice was there would be a packing list of the parcel and they would send emails to each other in relation to the packing list.  Mr Townsend had explained that if samples were sent then there would be a list, but if documents were sent, there would be no list.

71.  D1 had also put to Mr Townsend that according to his computer record, there were no records of any parcels received within 30 days after 4 May 2007, and had asked Mr Townsend to produce a copy of the airway bill for the parcel.  Mr Townsend told the Court that he had produced a copy of the airway bill to ICAC which was available to D1 at the time.

72.  However, there did not appear to be an airway bill among the evidence considered by the Judge during the Criminal Trial, nor was a copy mentioned in the Summary of Evidence attached to the Reasons.

73.  Under cross examination by D1 in relation to the 04.05.07 Letter, Mr Townsend had said that both Mrs Townsend and Charlotte Cudlip, P’s financial controller in the UK Office, were aware of the contents of the 04.05.07 Letter.

74.  D1 then referred the Court to an email sent by Charlotte to him on 7 September 2007[32].  In this email, Charlotte said that Mrs Townsend had asked her to ensure that D1 was aware that as P was still paying him a salary he would still be included in the Inland Revenue Employment Return at the end of the year, and D1 had responded in an email of the same date that this was not the case which Mr Townsend had agreed with him during his last visit, and had asked Charlotte to clarify with Mr Townsend (“07.09.07 Email”). 

75.  D1 further went on to say in his 07.09.07 Email that he was not officially employed by any company in Hong Kong and that was why he did not enjoy any benefit mandatory by law, such as MPF, medical and labour insurance, and by return, he did not need to pay personal income tax.  He ended by asking Charlotte to let him know if Mr and Mrs Townsend did not think so.

76.  D1 had asked Mr Townsend during the present trial that if the 04.05.07 Letter did exist and sent to him, why would Charlotte need to send her email of 7 September 2007, and Mr Townsend’s response was that he was not sure, and said Charlotte’s email was not copied to him and that Charlotte could be referring to the UK Inland Revenue Department.

77.  During the present trial D1 maintained he first saw the 04.05.07 Letter when it was shown to him by ICAC.  He seemed to be suggesting  that the letter was fabricated by Mr Townsend because there was no written employment contract , and that the letter filled in all the gaps[33]. 

78.  However, throughout, it was Mr Townsend’s case that there was a written contract, namely the Employment Contract signed by D1.  

79.  Having said this, I accept that the evidence indicated that the parties’ communications were mostly by email, fax, telephone or by skype and there did not seem to be evidence of any other letters having been sent by P to D1 or vice versa.  In any event, it would seem rather odd that a copy of the letter was not sent by email or by fax at the time if the purpose was to confirm an agreement reached since an email or fax would reach D1 sooner than courier delivery.  Further, if the purpose of the 04.05.07 Letter was to confirm the agreement reached, it would seem odd that D1 was not asked to countersign and return a signed copy to P to signify his agreement to the terms. 

80.  Anyway, there was an email sent by D1 to Charlotte on 7 May 2007 and copied to Mr and Mrs Townsend (“07.05.07 Email”) referred to in the Reasons[34]. In this email, D1 set out details of two bank accounts at DBS, one being his payroll account (for GBP) (“Payroll Account”) and the other the Petty Cash Bank Account (for HKD only) and asking Charlotte to re-confirm with Mr and Mrs Townsend that his monthly salary would be paid in GBP at 2,500 (at GBP 30,000 per annum) into the Payroll Account with effect from May 2007. 

81.  Had D1 received the 04.05.07 Letter said to be sent by courier, there would not have been any need for him to send Charlotte the 07.05.07 Email or to seek any re-confirmation in relation to his monthly salary.

82.  There was no reference by Charlotte in her email of 7 September 2007 to the 04.05.07 Letter, and if she had indeed been informed of its contents, then it would seem that there was no need for her to send her email to D1.

83.  Having considered the above, I am prepared to give D1 the benefit of the doubt that he had never received a copy of 04.05.07 Letter, and attach no weight to the letter.

84.  As mentioned earlier, Mr Townsend’s evidence was that the New Arrangement was agreed only during the time he was in Hong Kong in April 2007.

85.  In fact, it would also appear from D1’s cross examination of Mr Townsend that the alleged Oral Agreement was made during the period when Mr Townsend was in Hong Kong between 16 April 2007 to 3 May 2007. However, when this was put to D1 by Mr Leung, D1 maintained that the Oral Agreement was reached in January/February 2007 when D1 went to visit P in UK, and that the agreement was confirmed with Mr Townsend when he was in Hong Kong and prior to renting the premises. 

86.  There was an email sent by D1 on 23 February 2007 to Mr Townsend and copied to Mr Palmer in relation to the subject matter “New pay scheme and business nature in China” ( “23.02.07 Email”)[35].  In this email, D1 appeared to be making proposals to P in relation to the details, suggestions and comments of the new pay scheme D1 was planning to implement on 1 March 2007 and in relation to what appeared to be the proposed setting up of another office in Mainland China by P through a domestic agency, instead of having a representative office, namely the Shenzhen Office.

87.  This was followed by another email of 5 March 2007 sent by D1 to Mr Townsend, attaching a long letter explaining the impact and consequence, advantage and disadvantage for any decision which was about to be made by P in relation to reforming the business nature (“05.03.07 Email”)[36].  In this email, D1 was providing an analysis of 3 options for Mr Townsend to consider for P, namely, (i) existing nature of the Shangzhen Office as an overseas representative office in the Mainland; (ii) to start a new business nature as a domestic company in Mainland; (iii) to run an office in Hong Kong. This was followed by another email of 12 March 2007 from D1 to Mr Townsend and copied to Mr Palmer, in relation to the cost breakdown details to set up a Hong Kong office(“12.03.07 Email”)[37]. 

88.  It is quite clear from the above emails that up until 12 March 2007, there was no final decision on P’s side to set up an office in Hong Kong.  As seen below, the decision to set up a Hong Kong office would seem to be only made by P shortly after the 12.03.07 Email[38].

89.  So far as emails were concerned, there were no emails to support D1’s allegation that there was the Oral Agreement (whether as pleaded by D1 or later as set out by him in his witness statement) made in about January/February 2007 when he was in UK.

90.  The rent of the Shenzhen Office was paid up to end of March 2007.  Two of the Mainland employees, Kathy Jiang Ke Fan and Papaya Wen Ling Li had their employment terminated at about end of March 2007 and had subsequently issued legal actions in Mainland for various payments allegedly due to them and these actions concluded only in June 2009[39].

91.  Anyway, Brenda’s last day of work was on 9 March 2007[40], but the proposed change of the “legal representative” of the Shenzhen Office from Brenda to Mrs Townsend had not yet been effected at the time. At the time, according to Brenda, the company chop of the Shenzhen Office was with the authorities for the purpose of effecting the change of the “legal representative” and the “financial chops” were still held by Brenda pending the change of the “legal representative” being effected.  As for the  handover of the Shenzhen Office to D1, this seemed to have taken place around 26 March 2007[41].

92.  So far as the Hong Kong Office was concerned, the Petty Cash Bank Account was opened by D1 in his personal name at DBS on 13 March 2007[42]. The Tenancy Agreement for the Hong Kong Office was signed by D1 in the name of Pacific Premiums as tenant on 30 April 2007[43].  The term of tenancy was for two years commencing on 11 April 2007.  

93.  I note that in the Criminal Trial, D1’s evidence was that when the Hong Kong Office opened in May 2007, he had reached an informal verbal agreement with Mr Townsend whereby they had become business partners and that Mr Palmer was aware of this arrangement, and that under this arrangement he was allowed to inflate prices on orders sent to P’s office in UK and to keep the difference, and that Mr Townsend was only concerned about the profits made at the UK end of the business[44].

94.  It would appear from the above that D1’s case during the Criminal Trial in relation to when the alleged partnership arrangement was formed was somewhat inconsistent with his present evidence.

95.  Having considered all the evidence available before this Court, I do not find there was sufficient evidence to support D1’s case that the Oral Agreement, if any, as alleged by him, was reached in January 2007/February 2007.  On his own evidence during the present trial, such agreement, if any, was confirmed in April 2007 when Mr Townsend was in Hong Kong and prior to the renting of the premises.  Further, as seen in the 07.09.07 Email referred to below, he himself had said that the agreement in relation to his status was only agreed with Mr Townsend during his visit[45].

96.  To summarise, I find any plan or decision by P to open an office in Hong Kong was only made by Mr Townsend on about 13 March 2007 when the Petty Cash Bank Account was opened or thereafter.  Any new agreement or arrangement in relation to the structure of the payment to D1 was agreed only in April 2007 between Mr Townsend and D1 during Mr Townsend’s visit to Hong Kong and prior to the opening of the Hong Kong Office.

The alleged terms of the Oral Agreement

97.  D1’s case as to the terms of the Oral Agreement had been   rather inconsistent.

98.  As said earlier, his case in the Criminal Trial was that Mr Townsend and him had become business partners.  What he had said during the Criminal Trial in relation to the informal verbal agreement with Mr Townsend was that (i) he was allowed to inflate prices on orders sent to P’s UK Office; (ii) he was allowed to keep the difference; (iii) that the amount by which his prices were inflated was highly confidential, in that he would not ask Mr Townsend how much he made, and D1 would not disclose the amount by which he inflated the prices to Mr Townsend[46].

99.  As pointed out by the Judge in the Reasons, in fact D1 not only marked up the prices of the products, in some cases he had marked up the prices for tooling and instructed the suppliers to return this amount to him as well, and D1 was unable to give any satisfactory explanation as to why these extra sums were paid to him[47].

100.  As further pointed out by the Judge, D1 said he did not keep proper accounting records nor did he disclose earnings to the Inland Revenue Department[48]. In fact, the Judge had also commented that it was a fundamental duty of every partner to show the utmost good faith in his dealings with the other partners, and partners would be bound to render true accounts and full information of all things affecting the partnership to any partner[49].  The Judge said that it was obvious that not only had D1 done his utmost to conceals his profits with Mr Townsend, but his profits had been concealed in such a way that only by going to and beyond source documents was it possible to ascertain what profits were being made, and that there was deliberate and systemic concealment by D1[50].  The Judge had further said on the face of it, no profit was being made in Hong Kong at all[51].

101.  The Court of Appeal had also held that the Judge was right to find D1 had kept no proper accounting records and such accounting records as D1 kept were entirely consistent with not making any declaration at all to the Inland Revenue[52].

102.  In the present action, D1’s pleaded case on the terms of the Oral Agreement in his defence and counterclaim became as follows[53]:

(i)   the Shenzhen Office was to be closed;

(ii)   D1 was to run and manage the “HK Operation”[54] performing the functions of a buying office, as an independent contractor;

(iii)   The “HK Operation” was to serve as a buying office for P and to provide follow up and liaison services to P;

(iv)   P would cause to be paid to D1, a fixed amount every calendar year, namely USD250,000, based on 5% of P’s nominal annual revenue of USD 5m, to run the “HK Operation”;

(v)   As part of the consideration of running the HK Operation at the fixed cost irrespective of work load, D1 would be entitled, on his own arrangement and devise, to earn an increase in price from the supplier’s original quotations for any product, as long as D1 was able to offer a cheaper unit price than those found and sourced by P or its staff;

(vi)   The fixed cost of USD 250,000 would be paid by P in the following manner throughout the relevant calendar year:

(a)   all expenses of the running of the “HK Operation” would be paid for by P upon sight of the invoices;

(b)   all salaries of those staff, to be employed by D1, were to be paid for directly by P to them;

(c)   a monthly payment agreed at GBP 2,500 was to be made to D1 (“Part Payments”);

(d)   at the end of the calendar year, after taking into account all the above, P would agree to pay any balances up to the agreed sum of USD 250,000 (“Year End Balances”).

103.  It was further pleaded that by another subsequent oral agreement between Mr Townsend and D1, the Part Payments in (vi)(c) above were increased to GBP 2,750 as of September 2008 (“Variation Agreement”), and that between 1 May 2007 and 16 August 2010, D1 was therefore an independent contractor providing the services of a buying and sourcing office for P[55].

104.  Thus, it would appear from the above that D1’s pleaded case was the Oral Agreement was between D1 and P (through Mr Townsend)[56], and that his relationship with P was that P was to be the principal and he an independent contractor, and not really a partnership.

105.  D1’s defence and counterclaim was first filed on 15 March 2013, after Ds’ conviction at which time he was legally represented, and his then Counsel had settled the pleadings.  There were no amendments to this part of his pleadings subsequently in the AD&C.

106.  However, according to D1’s evidence in his witness statement dated 12 October 2015[57], the Oral Agreement included the following terms:

(i)   The Shenzhen Office was to be terminated and a company was to be set up in Hong Kong having the same nature;

(ii)   D1’s status would be that he would no longer be employed by anyone or any company, bout would operate Hong Kong Office on the basis of division of labour with Mr Townsend; D1 would be responsible for purchasing in Mainland China, and Mr Townsend would be responsible for marketing; P would stop filing salaries tax returns for D1, or contributing towards the MPF scheme and that D1 would need to handle the relevant matters himself;

(iii)   Mr Townsend agreed to pay the Hong Kong Office an amount of USD250,000 each year as fixed operating expenses, which included office rental and management fees, employee salaries and statutory benefits, recurrent expenditures such as telephone, water, electricity or internet charges, but excluding third party charges incurred by purchase orders, such as fees for inspection and tests, goods samples, transportation and express deliveries; in case the fixed operating expenses were exceeded, Mr Townsend would not be responsible for the exceeded amount; according to the 2006 financial statement of the Shenzhen Office, the expenditures for that year was USD430,000; in other words, the new agreement would save  over 40% of expenses for Mr Townsend;

(iv)   The fixed expenses would be split equally into 12 months, the employee salaries of the Hong Kong Office would be paid directly by P, and after deducting the salaries the monthly operating expenses would be reimbursed to the Hong Kong Office according to the receipts presented; if the expenses for a certain month had exceeded the limit, it could be carried forward to be offset in the next month, and if the cumulative amount of expenses reached the upper limit, P would not be required to pay for the expenses incurred thereafter.  Should there be any operating profit, the profit would be paid to D1 in one lump sum at the 12^th month from the effective date of the agreement;

(v)   The Hong Kong Office had to provide P with purchasing services of the same nature as those previously provided by the Shenzhen Office; P had the right to raise queries on each detail of the quotation supplied by the Hong Kong Office and could ask other suppliers to submit quotations in respect of the same subject matter, but P could not ask for a quotation from the same supplier that the Hong Kong Office had contacted;

(vi)   P was not obligated to place an order with a supplier referred by the Hong Kong Office, and had the final decision to choose suppliers and for an order placed with a supplier not referred by the Hong Kong Office the Hong Kong Office promised to provide to P with the follow up services on the order;

(vii)   Without P’s prior consent, the Hong Kong Office could not provide purchasing services or related services to other companies.

107.  It can be seen from the above, D1 had set out in detail the terms of the alleged Oral Agreement.  By the time his witness statement was filed in October 2015, D1 was acting in person and appeared to have by then completed serving his sentence.

108.  I note in particular the following:

(i)   There was no mention by D1 in the above terms of the monthly Part Payment of GBP2,500 to be paid to him;

(ii)   All operating profits would be paid to D1 in one lump sum, and there was no mention of D1 being allowed to inflate prices or keep the differences, or to keep the mark up on tooling prices.

109.  In any event, what D1 said in his witness statement in relation to the terms of the Oral Agreement was quite different from his pleaded case in particular, the Oral Agreement was between him and Mr Townsend[58], and one of the terms of the agreement was that he would operate Hong Kong Office with Mr Townsend on the basis of “division of labour”.

110.  Thus, D1’s case seemed to revert to that of some kind of a partnership arrangement between him and Mr Townsend, or a “loose partnership arrangement”, as referred to by the Judge at the Criminal Trial[59].  This seemed also to be his case when he was cross examining Mr Townsend in the present trial.

111.  However in D1’s closing submissions, his case had again changed somewhat, in that he submitted that from the first day of the setting up of the Hong Kong Office, D1 became his own boss and that Mr Townsend became his customer and a business partner[60].  He further submitted that the benefit to Mr Townsend was that his expenses of USD 430,000 were reduced to a ceiling of USD 250,000 and that Mr Townsend was guaranteed the lowest quotation and the highest quality from D1 and that Mr Townsend had the final say whether to obtain quotations from other suppliers as comparison.

112.  During cross examination, D1 was asked whether he had filed any tax returns in relation to the millions of dollars he made.  He said he did file personal tax returns but did not produce any. 

113.  Then for the first time, attached to his Closing Submissions is a copy of a profits tax demand for the year 2008/2009 issued by the Inland Revenue Department on 10 June 2011 to “Mr Che Man Tock trading as Chae Man Tock” at his residential address. The assessed profits for that financial year was HKD600,000, and the tax payable at 15% was HKD99,000 (“Profits Tax Demand”).  This was not produced in the Criminal Trial or before the Court of Appeal, nor during the course of the present trial.

114.  Mr Leung objected to D1 producing the Profits Tax Return after the trial and only in his Closing Submissions.  P was not given any opportunity to seek specific discovery for the underlying documents, nor was P given any opportunity to cross examine D1 in relation to the Profits Tax Demand.

115.  On the face of the Profits Tax Demand, D1 had a business in his sole name.  It was however not clear when this business commenced and whether he held a business registration certificate.  It was also no clear as to the nature of this business.  It would appear from the document that he had not filed a tax return for 2008/2009 and the profits tax was based only on an assessment by Inland Revenue Department, and that D1 was reminded to file his tax return as soon as possible.  It was not clear how the Inland Revenue Department came up with the assessment of HKD660,000, and whether it was based on previous year’s profits or not. 

116.  There was no supporting information from D1 to show that the source of the amount of HK$660,000, whether it came from “operating profits” of the Hong Kong Office, or from P, or from the suppliers being the difference between the inflated prices of materials provided to P and the actual prices paid to the suppliers, or from a completely unrelated source.

117.  I find without the underlying documents, the Profits Tax Demand would not be of assistance to D1.  I allow D1 to produce it but attach no weight to it.  

118.  Having considered, D1’s evidence on the Oral Agreement, in particular his inconsistent case on the terms of such agreement, I have come to the view that D1 has not been able to satisfy this Court that the Oral Agreement with the terms as pleaded by him or alleged by him existed. In this respect, I am of the view that the only agreement that Mr Townsend and D1 had was the New Arrangement reached sometime in April 2007 while Mr Townsend was in Hong Kong prior to the commencement of the Hong Kong Office.

Mr Townsend’s alleged business practices, forgery, and loans

119.  Throughout the trial and in D1’s Closing Submissions, D1 had tried to paint a picture of Mr Townsend being unscrupulous in his business practices, that he had produced forged documents and that he had asked D1 for loans.

120.  The allegations of Mr Townsend’s business practices were that:

(i)   He had duped D1 into entering into the Oral Agreement and had used the Criminal Trial and these proceedings in order to avoid P’s obligations under the Oral Agreement;

(ii)   P had through Mr Townsend duped a supplier in Mainland and forced the supplier to accept a lesser sum of 50% balance instead of the full agreed price;

(iii)   Mr Townsend had tried to make Brenda responsible for dealing with the staff of the Shenzhen Office at the time of cessation.

121.  So far as (i), it was Mr Townsend’s case that there was no Oral Agreement at all as alleged by D1. As for (ii), the supplier in question Qicai Balloons Co Ltd was a supplier of balloons which D1 alleged Mr Townsend had misled.  The incident was in September 2006[61]. What happened was that P had sent a “payment advice” which allegedly led the supplier to believe that the balance of the invoice had been paid and therefore the supplier released the goods but then after delivery, Mr Townsend then sought a 50% reduction.  Mr Townsend’s explanation during the present trial was that there was a quality issue and in any event, he said the supplier was in the end paid 30% of the balance within 24 months. D1 said there was no documentary evidence produced by Mr Townsend in relation to the payment of the balance.  There was however also no evidence to contradict what Mr Townsend said.  In any event, this incident was during the 1^st Period and the incident did not defer D1 from entering into the alleged Oral Agreement.

122.  As for (iii), as earlier mentioned, Brenda’s last day of work at the Shenzhen Office was 9 March 2007 and the Shenzhen Office was closed only around end of March 2007/early April 2007. By about 26 March 2007, Brenda had handed over the Shenzhen Office to D1.  The Mainland staff left or were let go only at end of March 2007.  Two of the Mainland staff had not received what they demanded.  D1 seemed to be suggesting that Mr Townsend was unscrupulous in not wanting to pay the two staff.  D1 had also referred to an email sent by Mr Townsend apparently pointing out that the Shenzhen Office was held by a company no longer in existence, to show that Mr Townsend was trying to shirk his responsibility as an employer. 

123.  Mr Townsend had explained during this trial that it was FESCO (Foreign Enterprises Service Corporation) in Shenzhen which was to pay the two employees Kathy and Papaya whose employment was terminated by the Shenzhen Office at end of March 2007.  FESCO is the organisation which provides services for foreign enterprises in the creation and contribution of social insurance and other benefits for Mainland employees under the government regulations.  As seen in the decisions of the Shenzhen Intermediate People’s Court[62], the Shenzhen Office had entered into a service contract with FESCO and the employees in question, and on about 11 April 2007, the two employees made a claim against the Shenzhen Office and FESCO in the Labour Dispute Arbitration Committee in Shenzhen for amounts allegedly due to them.  The Committee made an award against the Shenzhen Office and FESCO jointly and severally for part of the amounts claimed by the two employees.

124.  After the awards were made, both FESCO and the two employees had appealed to the Intermediate People’s Court, and both appeals were dismissed on about 30 April 2009. Subsequently, in August 2009, FESCO’s Mainland lawyer had sent a letter to P to seek reimbursement of amounts paid by FESCO.

125.  The two employees were paid off by FESCO.  Although it was not clear whether P repaid FESCO in the end, there was no sufficient evidence that P had shirked its responsibility as an employer.

126.  D1 had also alleged that P had some disputes with Brenda over her payments at the time[63]. Further in his Closing Submissions, he submitted that the relationship between Mr Townsend and Brenda had turned very bad[64].

127.  The emails between Brenda and Mr Townsend in early April 2007[65] did seem to indicate that there was some tension between the two of them over the handing over of the “financial chops” by Brenda, in that she was reluctant to hand over the “financial chops” until all payments due to her were paid by P, and in the end Mr Kwong had to be involved as the middle man.  However, Mr Townsend’s evidence during the trial was that later Brenda had told him that she was reluctant to hand over the “financial chops” to D1 as she did not trust him, and according to Mr Townsend, he and Brenda were still friends at the time of the trial and that they still saw each other.

128.  As mentioned earlier, Brenda was not called to give evidence for either side.  There was really no sufficient evidence to support D1’s allegations.

129.  Anyway, for the purpose of setting up the buying office in Hong Kong and to enter into a lease for the office, it was D1’s case that he had suggested to Mr Townsend to jointly set up a company in Hong Kong, but Mr Townsend rejected this, and suggested that D1 should set it up himself. D1 said he declined this suggestion, and therefore he was told by Mr Townsend to contact Mr Kwong for the signing of the Tenancy Agreement.

130.  The Tenancy Agreement was eventually only signed on 30 April 2007 in the name of Pacific Premiums[66], and Mr Kwong provided   the Business Registration Certificate of Pacific Premiums for the purpose of signing the Tenancy Agreement.  D1 had claimed that he had personally paid for the rental deposit.  

131.  Even if D1 was right, there was no evidence that he was not subsequently reimbursed.   

132.  D1 had asked Mr Townsend why he did not personally sign the Tenancy Agreement since he was in Hong Kong at the time. Mr Townsend had said he was not offered the agreement to sign at the time but he said he did sign the renewal in the name of Pacific Premiums when the term of the Tenancy Agreement expired in 2009.  There was no sufficient evidence that by not signing the Tenancy Agreement, Mr Townsend was in anyway shirking his responsibility.

133.  In about April 2007, Mr Kwong had wanted to resign as director of Pacific Premiums.  According to D1, Mr Townsend had requested him on numerous occasions to replace Kwong as director of Pacific Premiums, or to set up an independent company to take the place of Pacific Premiums, but D1 said he declined.  However, Mr Townsend said D1 did in the end agree to be a director of Pacific Premiums but then he and his wife had second thoughts about it.  It would appear that eventually Mr and Mrs Kerslake[67] replaced the Kwong brothers as directors of Pacific Premiums[68].  According to the audited financial statements of Pacific Premiums for year ended 31 March 2009, the change took place on 19 December 2008.  According to the annual return of 2 March 2009, the nominee shareholders had also been changed and so were the directors.  There was no dispute that Mr Townsend and/or Mrs Townsend or P had always been the beneficial owners of this company.  The fact they were not shown in public records as having any connection with this company would not mean Mr Townsend was being unscrupulous.

134.  I accept that Mr Townsend’s evidence during the present trial was sometimes rather vague.  However, having considered the evidence, I do not find there was sufficient evidence that Mr Townsend was unscrupulous in his business practices.  As said earlier, the Qicai Balloon incident was in September 2006 prior to the alleged Oral Agreement.  In any event, even if Mr Townsend had been unscrupulous, all the incidents cited by D1 would have become apparent to D1 latest by early April 2007 when on D1’s own case the alleged Oral Agreement had not been confirmed by Mr Townsend.  As D1 had himself said, he had 20 years of work experience, there was no reason as to why D1 would want to continue to set up the Hong Kong Office for P if he found Mr Townsend unscrupulous.

135.  As for the allegations in relation to the forgery of the Employment Contract and the 04.05.07 Letter, these have been dealt with earlier.  Forgery is a serious allegation.  Even though I find there was no sufficient evidence that D1 had signed the Employment Contract or had received the 04.05.07 Letter and I attach no weight to those documents.  I do not find there was sufficient evidence that those documents were forged by Mr Townsend.

136.  As for the Petty Cash Bank Account, D1 had said that the arrangement of this account only arose because he did not have a company in Hong Kong to operate its business, and he had further alleged that he had assisted P with loans for the purpose of paying suppliers and that he did not seek any interest on the said loans.

137.  If D1 indeed considered himself as operating his own business, there was no reason why he could not have set up a company on his own.  In my view, the fact that P or Mr Townsend did not wish to set up a new company in Hong Kong with D1 would assist P’s case more than D1’s case.

138.  The evidence produced during the Criminal Trial indicated that D1 had on occasions advanced payments on behalf of P, eg a payment of USD50,000 around 22 April 2008[69]. D1 had further set out in his Closing Submissions a list of payments which he alleged were paid by D1 on behalf of P, or so called “loans without interest”[70] but even in his own submissions, he was reimbursed afterwards within 1 or 2 days to longest about 19 days.

139.  D1 had kept so called “accounting records” or petty cash records (“Petty Cash Forms”) for the Hong Kong Office[71].  However, as pointed out by Mrs Townsend they only found out later the figures on the Petty Cash Forms did not always reconcile with the statements of the Petty Cash Bank Account which were not sent by D1 to P at that time.  In any event, even if D1 did have to make those so called “loans without interest” on behalf of P on some occasions, this would not necessarily make D1 a partner or an independent contractor.  

Whether D1 was an employee during the 2^nd Period

140.  There was no dispute that up until end of April 2007 D1 continued to be employed by P under the same terms as when he was initially employed in April 2006. 

141.  Since it was P’s case that the 04.05.07 Letter contained the agreement reached between Mr Townsend and D1 in relation to the New Arrangement, thus according to P, under the New Arrangement, D1 would still continue to receive company benefits such as holiday pay, sickness pay and employee insurance etc, and that D1’s monthly salary would be GBP2,500 per month plus double pay for Chinese New Year, and company bonus and performance related schemes as applicable.

142.  During the Criminal Trial, it was Mr Townsend’s evidence that the New Arrangement was D1’s idea and for his advantage.  D1 on the other hand had said in the Reasons this was done at the suggestion of Mr Townsend and that it was to be a tax advantage to Mr Townsend from a tax perspective.  The Judge had said in the Reasons that if what was alleged by D1 was the case, then all salaries for the Hong Kong Office would be paid by P in GBP[72].

143.  Anyway, whether the amount to be paid to D1 was in HKD or in GBP, so far as P was concerned, it would still be a salary payment or wages paid to an employee and I do not see how the switch to GBP would be a tax advantage for P.  Mr Townsend’s evidence during the present trial was that P would deduct the salaries tax for the employees in UK Office to pay to the UK tax authorities and for Hong Kong employees, P filed employer’s tax returns for them in Hong Kong, save for D1 from 4 May 2007.  Thereafter, D1’s wages would be part of the expenses for the Hong Kong Office which P reported in its UK tax returns.

144.  During the Criminal Trial, the prosecution had produced the National Westminster Bank “Payment Debit Advices” which showed that in late May 2007, the first of the payments of GBP 2,500 per month was made by P to D1’s Payroll Account as stipulated by D1 in his 07.05.07 Email to Charlotte.  That payment and all subsequent monthly payments up to and until July 2010 were described as “wages”, whereas previously during the period from March 2006 to April 2007, the description was apparently “salary”.  Further, on dates that coincided with the Chinese New Year, namely in January 2009 and January 2010, but not January 2008, D1 received payments of double the usual monthly payments[73]. There were also no MPF payments for D1 as from May 2007 onwards.

145.  There was no evidence that there was anything peculiar between the description of “salary” and “wages”.  Whichever description used, whether salary or wages, normally only an employee would be receiving a salary or wages.  One would not describe payments to a partner or regard such payments as salaries or wages unless the partner is a partner in name only and/or in fact a “salaried partner”, which was not D1’s case anyway.

146.  Further, as mentioned earlier, in the Reasons, the Judge had considered a number of email exchanges, in particular (i) those in January 2008 between Mr Townsend, Mrs Townsend and D1 concerning the payment to a Mainland supplier in RMB equivalent to USD 162,000, (ii) email exchanges in June 2008 re holidays for D1 and D2, (iii) email exchanges in September 2008, (iv) email exchanges around 30 June 2010 in relation to bonus for staff of Hong Kong Office, (v) email exchanges in July 2010 re “Braun Bag” shipment[74]. The Judge concluded that the cumulative effect of these emails, taken in conjunction with the other circumstantial evidence pointed strongly to D1 being an employee of P, rather than a business partner of Mr Townsend.

147.  There was no dispute by D1 to the contents of those emails. The Judge had in particular set out in full D1’s email in response to Mr Townsend’s email of 30 June 2008 regarding bonuses[75].  In his response email, D1 had said, amongst other things, he had tried to do his job as per the expectations of Mr Townsend since the first day he was with P, referring to Mrs Townsend driving him mad and said that Mr Townsend and Mr Palmer should be the persons he reported to and that this was not an unreasonable request.  Further, he had asked Mr Townsend not to ask him to pay the company expenses from his pocket and that Mr Townsend should ensure enough funds were being transferred by the end of each month to cover the expenses of the following month.

148.  What D1 had said in the above email would not support his case that he and Mr Townsend were partners or that D1 was an independent contractor. 

149.  The Court of Appeal had also referred to those emails mentioned by the Judge and found that the Judge was entitled to determine that D1’s tone in those emails was entirely inconsistent with his assertion that he was a partner with Mr Townsend[76].

150.  The Court of Appeal had also referred to two letters, one dated 10 June 2010 from Mr Townsend to ICAC and also a letter dated 5 December 2008 written by his UK solicitors to a firm of solicitors in Hong Kong called CO Chan & Co purportedly acting on behalf of a supplier Aesthetics Prototype Limited (“APL”).  The first letter had referred to D1 requesting to be self-employed, and the second letter referring to D1 being P’s agent.  The Court of Appeal said that the Judge had considered the two letters which contradicted or undermined the crucial evidence of Mr Townsend that D1 was an employee.  However, the Court of Appeal also said that the Judge had considered the overwhelming amount of evidence pointing to the fact that D1 was an employee, and as mention earlier, the Court of Appeal found the Judge’s description of such evidence as “compelling and persuasive” was entirely apposite[77].

151.  As for the incident concerning APL, during the Criminal Trial, it was Ds who produced a letter dated 23 August 2008 from the firm of Hong Kong solicitors C O Chan & Co purportedly acting for APL to D1, claiming that D1 owed APL about HKD 215,000 for materials sold.  Then there was a personal cheque dated 2 July 2008 drawn from D1’s Payroll Account with DBS for the sum owed.  One of the reasons D1 produced this letter at the time of the Criminal Trial was to show he was making payments on behalf of P which would be inconsistent with his position as an employee.

152.  As it turned out, the payment was not in fact made.  The cheque was later stopped by D1 on instructions of Mr Townsend because of quality issues over those materials.  To cut the long story short, it seemed D1 then subsequently told Mr Townsend that he was being threatened by debt collectors over this matter, which then led to Mr Townsend instructing his UK solicitors to send the earlier mentioned letter of 5 December 2008 C O Chan & Co.  It transpired eventually that it was in fact D1 who was the one  giving instructions to C O Chan & Co[78].  As seen in the Reasons , the Judge had in the end found that the letter from C O Chan & Co demanding payment was arranged by D1 in an attempt to recoup his profit on this deal and in fact the Judge was of the view that the matter should be referred to the appropriate authorities for investigation and the Hong Kong Law Society[79].

153.  The above incident in fact would raise a query in my view as to whether it was indeed necessary for D1 to make all those payments or “loans without interest” on behalf of P, as alleged by him.

154.  In an email sent by D1 to Mr Townsend around 22 April 2008, as quoted by the Judge in the Reasons, D1 had mentioned, amongst other things “ to discuss to be a shareholder”[80], and referring to there being a big potential that P could take a bigger step to become a sizeable corporation.  What D1 said in his email of 22 April 2008 again would not support his case that he was already a business partner with Mr Townsend.

155.  There was no dispute that the principal purpose of the HK Office was for the purposes of sourcing goods for P.  There was no allegation and/or assertion that it did anything additional and/or separate from this. 

156.  While some payments in RMB were paid through an account in Hong Kong, the evidence showed most of the invoices were paid directly by P to its suppliers in Mainland China.

157.  There was no sufficient evidence that Ds had sourced products for other companies, apart from P’s Hong Kong Office.

158.  The Court of Final Appeal has held in Poon Chau Nam v Yim Siu Cheung [2007] HKCFA 19; (2007) 10 HKCFAR 156 that the modern approach to the question whether a person was an employee was to examine all the features of their relationship against the background of the indicia of employment with a view to deciding whether, as a matter of overall impression, the relationship was one of employment.  This involved a nuanced and not a mechanical approach[81].

159.  In the present case, as seen in the emails:

(i)   The Hong Kong Office was rented by Pacific Premiums;

(ii)   Monthly rent and all running expenses of the Hong Kong Office were paid by P;

(iii)   D1 had sent contracts of employment of the staff to P for approval on 7 May 2007;

(iv)   D1 had to seek P’s approval in relation to employment of any staff;

(v)   D1 had written to Mr Townsend to seek permission in relation to taking any leave;

(vi)   D1 had written to Mr Townsend to request for bonuses;

(vii)   On the face of it, D1 was running P’s business of sourcing from suppliers for P, but there was no sufficient evidence of any capital or funding by D1 in the running of the Hong Kong Office, save for advances which were reimbursed by P;

(viii)   P filed employer’s tax return for all the Hong Kong staff with the of D1 after 4 May 2007.

160.  D1 had asked if he was indeed an employee making secret profits, why did he not hide all the monies he made and instead kept all his monies in his and/or D2’s bank account/s for P to claim.  There was however no sufficient evidence that Ds had disclosed all their bank accounts to P.  It was also not clear how much Ds had in fact made or received.  Anyway, the burden was on D1 to prove that he was not P’s employee during the 2^nd Period.  Although D1 was in charge of his own MPF contributions and tax obligations, these of itself wold not be determinative factors in the overall assessment.  Having considered all the evidence available before this Court, I am of the view that D was not able to discharge the burden on him.  It is my finding that he was an employee of P during the 2^nd Period.

Whether D2 was P’s employee

161.  It was P’s pleaded case that from about 1 August 2007 to 16 August 2007, D2 was employed by P as a merchandiser in the Hong Kong Office.

162.  It was not really disputed by D2 that she started to work in the Hong Kong Office, but according to D2’s witness statement, it was at D1’s request and on 7 August 2007, that she resigned from her then job and joined D1’s company as a senior merchandiser.  There were 3 other merchandisers working in the company at the time.

163.  According to her witness statement, D2 obtained a Bachelor of Industrial Engineering from the Hong Kong Polytechnic University in 2002 and after graduation, she had pursued a career in merchandising and sourcing for large enterprises.  She said she married D1 in 2004.  She had also mentioned that in 2003 to 2004 she worked in a company called EMI which source gift and promotional items for big enterprises such as Burger King and KFC.

164.  On the other hand, during the trial, and also in her Closing Submissions, D2 had said prior to joining the Hong Kong Office, she was working as a senior merchandiser at EMI, an American company, earning a monthly salary of HKD 28,000.  Whichever, what she said in the present trial appeared to be somewhat different from her evidence during the Criminal Trial.  As set out  by the Judge in the Reasons, prior to joining the Hong Kong Office, she was working for a European company as a merchandiser earning a salary of HKD26,000[82]. As seen in the CA Judgment[83], the European firm was called RT Sourcing.

165.  Anyway, the impression which D2 was trying to give was that she had accepted a lower salary when agreeing to work for the Hong Kong Office.  There was however no sufficient evidence provided by D2 as to her last job or last salary immediately prior to her joining the Hong Kong Office.  Further, according to D1, he had told D2 that she would be paid commission on the orders she handled.  There was no sufficient evidence that she was receiving a lower salary at the Hong Kong Office.

166.  During the present trial, D2 had said that not only her, but different staff members would be paid different commissions by D1, if there were no problems in the orders handled by them after one year. When asked whether those monies credited into her and/or D1’s account were commissions or not, D2 had said those millions of dollars in her account were D1’s profits, and not her commissions.  The amount of commissions received by her was thus not clear.

167.  There was no supporting evidence from D2 as to what commissions were paid to her by D1 during the time she was working in the Hong Kong Office.  As found by the Judge during the Criminal Trial, commissions received by her were paid by the suppliers, and although D1 said he had authorized her to receive the same, the Judge had found that D1 had no such authority to authorize such payments to D2, and that D2 was aware that D1 had no such authority, and further P knew nothing of the payments of commissions to D2 and would not have authorized such payments[84].

168.  Anyway, D2’s pleaded case was that, amongst other things :

(i)   to the best of her knowledge, D1 ran an operation in Hong Kong and provided the services of a buying and sourcing office for P in Hong Kong, and he was an independent contractor with profit sharing arrangements with P;

(ii)   at all material times, D1 was an independent contractor entitled to offer to P an increased price from the original quotation from the supplier so as to make a profit for himself and support the Hong Kong operation;

(iii)   Further or in the alternative, at all material times, D2 was in the genuine and honest belief that D1 was an independent contractor.

169.  In her witness statement, she had said that she had understood from D1 that it was Mr Townsend who told D1 that the Shenzhen Office was to shut down because of losses, and that Mr Townsend had proposed to D1 that they could enter into a kind of partnership whereby D1 would operate his own buying office in Hong Kong and then earn profits/commissions through sourcing and procuring goods and that D1 would certainly needed to be responsible for the loss incurred in the operation of the office, if any. According to her, D1 accepted the proposal when he was in UK[85].

170.  D2 had said that she was under a genuine belief that she was D1’s employee and that throughout she conducted all her work in accordance with D1’s instructions as her employer. She had however said in her witness statement that she understood that Mr Townsend would be responsible for the operating expenses of D1’s company, namely the rent and the salary of the staff of D1’s company, including her salary[86].  She had also said that D1 had told her that the mode of co-operation between D1 and Mr Townsend was rather unusual and this was because Mr Townsend needed to avoid tax in UK[87].  D2 had also said that D1 was obviously not an employee of Mr Townsend since D1 had used the money in their joint bank account to pay the suppliers in Mainland China and the amount was over HKD500,000[88].

171.  In her Closing Submissions, D2 had set out the matters which she said led her to believe that D1 and Mr Townsend to be partners and that D1 was responsible for sourcing and Mr Townsend was responsible for looking for customers.  The matters set out by her were:

(i)   Each time when Mr Townsend came to Hong Kong Office, he and D1 did not act as if they were employer and employee, and they had had arguments over several invoices, and also D1 often spoke to the UK Office on the telephone or emailed with UK Office until midnight Hong Kong time, from Mondays to Fridays;

(ii)   D1 had often asked her to lend money to pay suppliers of amounts of over ten thousand dollars, and even several tens of thousands;

(iii)   She never had to report to Mr Townsend over her work, and only to D1.  No one in the Hong Kong Office would need to report to Mr Townsend.

172.  It was not disputed that D1 was in charge of the daily operations of the Hong Kong Office as Office Manager.  That D2 had to report to the Office Manager over her work would not necessarily mean that the manager would be her employer.  So far as (i) was concerned, the evidence showed that Mr Townsend had full trust in D1 at all material times until the anonymous emails, having arguments over invoices would not necessarily mean that P was not the employer of D1.  Further, it would not be uncommon for an employee in Hong Kong to have communications with an overseas employer outside Hong Kong office hours.  So far as the alleged loans were concerned, even on D1’s own case, he was reimbursed.  In any event, all the matters listed by D2 would not of themselves make D1 a partner or his own boss, nor would it make D2 an employee of D1. 

173.  When shown by Mr Leung a copy of P’s employer’s tax return for 2009/2010[89] and asked whether each year P had filed the employer’s  tax returns in relation to her remuneration each year, D2’s response was that she did not study it, and claimed that from the first day of her recruitment by D1, all her tax returns and MPF contributions were arranged by D1. When asked whether she had received a copy of P’s employer’s tax return each year, she answered that she supposed she did or she could not be sure. As for her own employee tax returns, she claimed that she had delegated the filing of this to D1 and that D1 did the filing online. 

174.  I have to say I find D2 rather evasive in her above answers and I do not find her above answers believable.

175.  Mr Leung had referred to two emails dated 26 March 2007  (“26.03.07 Emails”)[90].  It would appear that at the time, D1 was looking for a “number 2” to help him, and was suggesting to P to employ D2 as “number 2”.  In the email from Mr Townsend, he said that he had made it clear that this would not happen, as it was bad for the relationship between D1 and D2 and also bad for the company if it did not work out, and asked D1 to contact the agency for a right person instead.  D1 then sent Mr Townsend a reply and although he said he was not trying to persuade Mr Townsend to employ D2, he clearly was trying to convince Mr Townsend to employ D2.

176.  D2 claimed that she never saw those emails before they were shown to her by Mr Leung. 

177.  It would appear that the 26.03.07 Emails were not produced during the Criminal Trial, as they were not referred to by the Judge in the Reasons. 

178.  Anyway, the evidence during the Criminal Trial was that D2 already had an email account at the Hong Kong Office for some months prior to becoming formally employed and was receiving payments into her bank account from suppliers[91]. When asked whether she was already using P’s email address even prior to her formally joining the Hong Kong Office, D2 had replied saying that D1 had let her use such address. 

179.  Although under cross examination by Mr Leung, D2 had disagreed being involved in discussions with suppliers prior to her formally joining the Hong Kong Office, this was the finding by the Judge in the Criminal Trial, namely that she was already involved in discussions with one supplier, Mega Handbag Manufactory Limited about price inflation. The general manager of this supplier had appeared as prosecution witness PW7 during the Criminal Trial and gave evidence under immunity[92]. 

180.  During the present trial, D2 then came up with the explanation that she was told by D1 that the payments from Mega Handbag in May 2007 was a repayment from the company for debts owed to D1.

181.  Mr Leung submitted, this answer from D2 was a new invention, since it was never mentioned during the Criminal Trial or during the appeal, nor was it ever put to PW7.

182.  There was no evidence produced by D2 to support what she said.  In any event, I do not find what she said was credible.

183.  The Judge had also referred to a draft letter found in D2’s “personal notebook” (“Notebook”)[93] during the Criminal Trial which had contained a draft letter, the text of which indicated that the draft letter was consistent with D2 writing to her employer, Mr Townsend, seeking a raise in her salary to HKD 25,000 per month. In the CA Judgment, the Court of Appeal held that the Judge was entitled to have regard to the draft letter as being wholly inconsistent with any belief in D2 that D1 was her employer[94].

184.  When asked by Mr Leung during the present trial as to whether she was drafting the letter to ask Mr Townsend for an increase, D2 said this was a template, and not what she had sent out.  In her Closing Submissions, D2 said at the time of the arrest by ICAC, she had had the Notebook for over 8 years, and inside, there were many different templates. The template extracted therefrom by the Judge had no recipient nor sender, and the amount of HKD25,000 per annum stated in the template did not make sense. 

185.  According to D2, the Notebook was seized by ICAC. It was not produced before this Court.

186.  D2 had received tertiary education, and her witness statement was in English.  According to her, she had worked for several large corporations.  The burden was on her to prove that she was employed by D1 instead of P.  I find that she had not been able to discharge the burden.  In any event, I find that the evidence, in particular P’s employer’s tax return, showed overwhelmingly D2 was employed by P and not by D1.

Whether Ds were in breach of their duties owed by them to P

187.  It was submitted by Mr Leung that an employee during the currency of his employment owes a duty of good faith to his employer and from this duty of good faith stems a duty not to make any secret profits. 

188.  Further Lord Oaksey stated in Reading v Attorney General [1951] AC 507 as follows[95]:-

“I do not think there is any difficulty in imputing to a servant an implied promise that he will account to his master for any moneys he may receive in the course of his master's business, or by the use of his master's property, or by the use of his position as his master's servant. There is nothing illegal in such a promise. On the contrary, in substance it is the basis for the equitable principle that an agent is accountable for profits made in the course of his agency without the knowledge and consent of his principal and no less accountable if the profits arise out of corrupt transactions. An agent is bound to know the law, and, therefore, when he enters into a contract of agency he impliedly undertakes to be accountable for any such profits.”

189.  Lord Oaksey went on to say, while there were situations where an employee was allowed to earn profits using his employer’s assets and not account for said profits to the employer, it would depend on the facts of each case[96].

190.  I have found that the Oral Agreement as alleged by D1 did not exist.  It is my finding that both D1 and D2 were employees of P, pursuant to any written contract of employment or oral contract.  There was no dispute that D1’s and D2’s duties were to source products from suppliers in Mainland China for the benefit of the P.  They were paid monthly salaries by P.

191.  I accept what was submitted by Mr Leung, that as a business it was obvious that it would be in the best interest of P to source goods of acceptable quality at the lowest price possible in order to maximise profits.  I am satisfied that it was an implied term of Ds’ employment that they owe a duty of good faith towards P.  Ds’ actions injured and/or harmed P by inflating the prices of its suppliers and tooling costs, and/or demanding commissions from suppliers.  I find Ds clearly in breach of their duties of good faith towards P and P is entitled to damages for such breach or alternatively an account for any sums and/or secret profits received by them as a result.

D1’s Counterclaim

192.  As seen earlier, D1’s pleaded case was that under one of the terms of the alleged Oral Agreement, as varied by the alleged Variation Agreement, he was entitled to Year End Balances paid by P and D1 counterclaimed against P the outstanding sum of USD 102,174.45 being the aggregate of the Year End Balances for (i) 1 May 2007-31 December 2007; (ii) for 2009; (iii) for 1 January -16 August 2010.  According to his calculations, there was no Year End Balance for 2008.

193.  As I have found that the alleged Oral Agreement as pleaded by D1 did not exist, it follows that his counterclaim must fail.

Quantum

194.  In the re-amended statement of claim P, P pleaded damages and loss suffered by P of a total of USD930,719,70 from Ds.

195.  Mrs Townsend is in charge of P’s accounting and finance and had provided a detailed witness statement setting out each item claimed providing the relevant supporting documents.  She had explained in her witness statement that when P adopted D1’s suggestion of opening the Hong Kong Office all staff in the Hong Kong Office were new employees and had not previously worked in the Shenzhen Office apart from D1 and the Mainland factory inspectors (who were Mainland citizens).  As the inspectors had to be paid in RMB they were be paid by the Hong Kong Office through the Petty Cash Bank Account while all other employees’ wages were paid directly by P by bank transfer from P’s UK bank account.

196.  Further, she had explained when an enquiry was received by P’s UK Office from a client, a “Brief” with the suffix “B” would be sent to the Hong Kong Office to source suppliers at competitive prices and on receipt of such prices from the Hong Kong Office, the client would be quoted a price and lead time. If the client accepted the price and sample the Hong Kong Office would be notified and the Hong Kong Office would request a “Proforma Invoice” from the supplier, which the Hong Kong Office would send to the UK Office and P would then issue a purchase order with the suffix “P” (“Purchase Order”) and sent it to the Hong Kong Office to forward to the supplier. 

197.  The supplier would typically require a deposit of 30% and this would be paid by P direct or if the currency was in RMB, then this would be paid via the Petty Cash Bank Account.  Once the order was complete, the goods would be inspected by one of P’s Mainland inspectors or from time to time, an independent inspection house and if the goods met the required quality levels at the Final Random Inspection (FRI) then the Hong Kong Office would upload the inspection report along with the supplier’s commercial invoice on to the “FM8” data base and P would make the balance payment to the supplier, and the goods were shipped to UK using the shipping agent chosen by the UK office.

198.  Mrs Townsend had explained that from time to time supplier payments were made by P to Pacific Premiums and then from Pacific Premiums to D1 to pay the suppliers or from Pacific Premiums directly to the suppliers, and this would speed up payment, such as when the vessel closing date was too close to the FRI date and the supplier would not release the goods for shipment until they had received the balance payment.

199.  For the trial, P had prepared a Scott Schedule (“Scott Schedule”) setting out the details of the numbers of the Purchase Orders upon which P’s claim was based, and the description of the goods, quantity ordered, and what P said was the difference between what P paid and the actual price from suppliers[97].  The Scott Schedule had been sent to Ds prior to the trial, but no response had been received by them.

200.  It was only during the trial that D1 eventually set out his reasons for disagreement on the Scott Schedule[98].  He had later also set out 27 Purchase Orders which he asked Mrs Townsend to provide proof that he had received the differences[99].

201.  However, as pointed by Mr Leung, the Scott Schedule had set out what P was claiming as the damage and loss suffered by P as a result of Ds’ breach of duties, namely by paying the inflated prices and therefore it was not necessary for P to prove what Ds had actually received.  I accept Mr Leung’s submission in this respect.

202.  Among the reasons/comments put forward by D1 in the Scott Schedule for disagreeing to the amounts, there were the following:

(i)   “no funds received from supplier”

(ii)   “Daniel handled this case”

(iii)   “Arrested by ICAC before shipment” in P15778

“No funds received from supplier”

203.  The above was D1’s reasons for disagreement for Purchase Order P15312 for “JD Pourer”.  However, what D1 put to Mrs Townsend was that he did not mark up the price for this order and that he had to pay for airfreight himself and never received the difference in the prices.

204.  D1 had produced some email exchanges between him and the supplier[100]. These emails showed that the supplier had remitted USD11,200 to an account of D2 but had mis-typed D2’s name and D1 had asked the supplier to confirm that the money was returned to the supplier and that last of the email communications indicated that the supplier had not yet received the return.

205.  The above emails would not assist D1.  Although it was not clear whether the supplier had arranged a further remittance, the fact that the supplier had tried to remit a sum of USD11,200 to D2’s account but mis-typed D2’s name showed that there was a mark up of USD11,200.  Mrs Townsend also pointed out that one of the spreadsheets D1 himself had produced during the Criminal Trial[101] (“Spreadsheets”) showed that D1 had received USD11,200.  I accept her evidence on this item.

206.  So far the other items marked “no funds received from supplier”, Mrs Townsend had demonstrated that P had paid for the inflated sums and had suffered loss as a result of Ds’ wrongdoing.  I accept Mr Leung’s submission that P should therefore be entitled to claim the differences between what was paid by P and the prices quoted by the suppliers.

207.  In fact, as pointed out by Mr Leung, Mrs Townsend had indicated on a number of occasions during cross examination that if Ds could provide evidence as to the actual amounts received by the suppliers, in respect of any of the Purchase Orders in the Scott Schedule, she would be prepared to consider adjustment to the quantum claimed, but no such evidence was adduced by Ds.

“Daniel handled this case”

208.  D1’s case on the items with these comments was that the rebate was received by Yeung, and not by him. P’s case was that the mark up was done/controlled by Ds.

209.  Mrs Townsend had explained when cross examined by D1 that Yeung only took a small commission and Yeung had admitted accepting HKD120,000 as commissions in the Criminal Trial and in the end gave evidence against Ds under immunity.  However, the inflated amounts or the differences between prices paid by P and prices quoted by the suppliers went to Ds. 

210.  D1 had referred to 5 Purchase Orders P15513, P15514, P15517, P15518, and P15541 of which he said the differences went to Yeung.

211.  Mrs Townsend maintained that what Yeung had admitted in receiving were in fact commissions of small amounts and Yeung had repaid the same to P. Mrs Townsend thus maintained that her calculations of the amounts under the above 5 Purchase Orders were Ds’ mark up, namely what she said were the differences between the inflated prices paid by P and the actual prices quoted by suppliers.  There was no sufficient evidence from D1 that the differences went to Yeung.  In any event, I accept Mrs Townsend’s calculations.

212.  There was another Purchase Order P15596 for “Leffe Menu Folders” which D1 alleged that Yeung kept the difference.  Mrs Townsend disagreed and in particular referred to an email of 12 May 2009 from Yeung to support P’s case[102] that the difference was transferred to Ds.  Again, I accept Mrs Townsend’s calculations.

P15778

213.  D1 claimed that P handed this shipment and that he had by then been arrested.  Mrs Townsend she did not believe that D1 had received the difference of HKD3,545.36. 

214.  However, P did pay the higher price and I accept Mr Leung’s submissions that P had suffered the loss and damage of this amount.

Other Purchase Orders

215.  Although no reason was given for disagreement against P 15322 for “hairbrush”, D1 had put it to Mrs Townsend that the difference in price was for the set up costs, or for the change of the logo, but Mrs Townsend’s response was that the logo was included in the price.  She then referred to the emails which only indicated the logo being smaller[103].  She also explained the setting up costs was USD120 at one go and not a big figure, and there was no change in the logo.  The emails showed P was quoted US$0.20 per piece while the supplier’s price was US$0.18 per piece. There was no sufficient evidence to support D1’s allegation.  I accept Mrs Townsend’s explanation and her calculations.

216.  On P15360, for “Thermometers”, D1 had put to Mrs Townsend that the supplier Hangzhou Kehang came from P to D1, and that the Shenzhen Office had previously ordered through that supplier and the price was quoted directly to P and the Purchase Order placed without going through the Hong Kong Office.  Mrs Townsend disagreed and gave an example of the supplier Kingsun for P15325 and P15352, with whom P had a very good relationship even before setting up the Shenzhen Office and D1 had admitted in the Spreadsheets receiving rebates on those two Purchase Orders.  Anyway, Mrs Townsend maintained that the Proforma Invoice for P15360 was sent to UK Office by the Hong Kong Office[104].  From the emails, it was clearly Hong Kong Office which was in direct communication with the supplier seeking the quotation.  I accept Mrs Townsend’s evidence the Proforma Invoice for P15360 was sent by Hong Kong Office to UK Office.

217.  On the above Purchase Order P15360, D1 had also put to Mrs Townsend that the price difference was due to the change in specifications but Mrs Townsend had said the cost of additional colours was minimal and maintained that it was impossible that the difference was due to any change in specification of packaging.  Again, there was no sufficient evidence from D1 that the difference was due to change in specification of the packaging.

218.  Anyway, for various other Purchase Orders, D1 had put it to Mrs Townsend that he had not received the difference or why he did not pocket the difference notwithstanding some of the amounts in the Scott Schedule came from the Spreadsheets produced by him.  D1’s reasons for disagreement in respect of each Purchase Order were never set out by him in his witness statement and it was only during the trial, he gave some written reasons in the Scott Schedule.  What he orally put to Mrs Townsend during the trial were mostly not included in the Scott Schedule.  These were only his assertions, and no sufficient evidence was provided by him to support his assertions.

Total amount

219.  Apart from putting forward his case while cross examining Mrs Townsend, D1 did not make any further submissions in his Closing Submissions in relation to quantum.  In D2’s witness statement, she listed out those Purchase Orders handled by her[105].  Mrs Townsend agreed to make adjustments for certain Purchase Order.  As for the rest, there was no sufficient from D2 that there was a change from the initial quotation as alleged by D2.  D2 did not cross examine Mrs Townsend, nor made any submissions on quantum. 

220.  Having considered all the evidence, I find that Mrs Townsend had been meticulous in putting together all supporting documents for each of the Purchase Order and/or the amount claimed.  She was reasonable by agreeing to certain concessions.  I find her a reliable witness and accept her evidence in respect of quantum. 

221.  The final amount in the amended Scott Schedule was adjusted to a total of USD 893,142.60.  I accept that this was the loss and damage suffered by P by reason of Ds’ breach of duties as employees.

Exemplary damages

222.  Although in the re-amended statement of claim, P sought both exemplary and aggravated damages, both P’s Opening and Closing Submissions focused on exemplary damages and P sought exemplary damages of an additional 20% of the sum of USD893,142.60, rather than an account for profits.  Mr Leung submitted that the present case is a case where an award of exemplary damages is appropriate.

223.  In the case of Rookes v Barnard [1964] UKHL 1, the House of Lords laid down the three situations where exemplary damages may be awarded.  This includes:-

(a)   Oppressive, arbitrary or unconstitutional actions by the servants of government.

(b)   Where the defendant's conduct was ‘calculated’ to make a profit for himself.

(c)   Where a statute expressly authorises the same.

224.  The above has been cited with approval by the Hong Kong Courts, in particular by the Court of Appeal in Allan v Ng & Co (a firm) [2012] 2 HKLRD 160[106].

225.  As said by Kwan JA in the above case, the rationale for exemplary damages is not to compensate but to punish.  They are additional to an award which is intended to compensate a plaintiff fully for the loss he has suffered, both pecuniary and non-pecuniary[107].  Kwan JA further cited an extract from Lord Nicholl’s judgment in A v Bottrill [2002] UKPC 44 [2003] 1 AC 449 [2002] 3 WLR 1406, which included the following[108]:

“… In the ordinary course the appropriate response of a court to the commission of a tort is to require the wrongdoer to make good the wronged person’s loss, so far as a payment of money can achieve this. In appropriate circumstances this may include aggravated damages. Exceptionally a defendant’s conduct in committing a civil wrong is so outrageous that an order for payment of compensation is not an adequate response. Something more is needed from the court, to demonstrate that such conduct is altogether unacceptable to society. The wrongdoer may be ordered to make a further payment, by way of condemnation and punishment.”

226.  However, Kwan JA went on to say that it is firstly important to distinguish the different roles of compensatory and exemplary damages and that it is easy to lose sight of this distinction if the court is to make a “combined award” of compensatory and exemplary damages and that the second important thing which follows from the rationale is that exemplary damages are a remedy of last resort.  She then referred to the “if, but only if” test mentioned by Lord Devlin in Rookes v Barnard,the effect of which is that if, but only if, the compensatory award is inadequate to punish the defendant for his outrageous conduct, then the court can award some larger sum to mark disapproval of such conduct and to deter the defendant from repeating the conduct.

227.  In the Allan case, Kwan JA awarded an amount of HKD400,000. Attached to that case was a table setting out the awards of exemplary damages between 1976 to 2010.  Mr Leung had added two further cases which were after the Allan case. In Lau Oi Kiu v Man Chun Shing [2015] 4 HKC 73, the plaintiff was awarded general damges of HKD828,000 and a sum of HKD288,000 in lieu of injunction, HKD200,000 as aggravated damages and HKD100,000 as exemplary damages.  In Law Lai Kwan v Intrend Finance Ltd [2017] HKDC 602 the plaintiff was awarded no general damages but received HKD 300,000 as aggravated damages and HKD200,000 as exemplary damages.

228.  The grounds for P to seek exemplary damages in the present case were:

(i)   D1’s actions were deliberate and premeditated.  He created a systematic scheme whereby he would profit immensely until the anonymous emails;

(ii)   Ds did not feel any remorse after serving their sentences, and had sought to run the same argument relied up on during their criminal trial and attempted to paint Mr Townsend in a bad light in an attempt to discredit him;

(iii)   Ds’ conduct also harmed society as a whole.

229.  Further, P relied on what the Judge had said, obiter, in his Reasons for Sentence dated 8 June 2012[109]:-

“18. The offences are serious offences involving a breach of trust. The fraud perpetrated on OIL-UK lasted for over 3 years and involved substantial sums of money. It was sophisticated in that it involved the creation of false documentation and required the cooperation of a large number of mainland suppliers.

19. Many international companies use Hong Kong as a safe and reliable business centre from which to do business on the Mainland.  Offences of this kind do immense damage to Hong Kong’s international reputation in this regard[110].”

230.  Mr Leung submitted that as a result of Ds’ actions, the suppliers that P had relied heavily upon had been tainted.  The mutual trust and reliance built over a long period of time had vanished in instant.  Even if P were to attempt to enter the market in Hong Kong, it would be immensely difficult as it would have to begin afresh.  There was however no sufficient evidence to support this.  Further, it would appear from Mr Leung’s Closing Submissions that although P’s turnover dropped significantly during the 2^nd Period, the situation then returned to normal and P’s business turnover went up again after Ds’ misconduct/fraud was discovered and stopped.

231.  Mr Leung accepted that Ds’ actions were not the worst of its kind.  Further, the P is a company and could not suffer direct physical or mental injury.  Mr Leung proposed a 20% of the sum claimed would be appropriate as an award of exemplary damages.

232.  There are no cases directly relevant to the quantum of exemplary damages, and there have been no cases, in so far as I can see, which have applied a percentage of the compensatory damages in awarding exemplary damages.

233.  In the present case, P will receive an award of substantial compensatory damages.  Applying the “if, but only if” test, I am of the view that the compensatory damages are adequate to punish and deter Ds for their conduct.  Having considered all the circumstances, I am not prepared to order exemplary damages.

Higher Rate of Interest 

234.  In the re-amended statement of claim, P claimed interest pursuant to the Court’s equitable jurisdiction and/or s48 of the High Court Ordinance[111]. In the Closing Submissions, Mr Leung argued compound interest should be awarded on the basis that there had been a complicated and long standing scheme to defraud P and that it required Ds to coerce many different suppliers to work in concert with them, and Ds were charged with multiple counts of fraud under the Theft Ordinance and convicted upon trial.

235.  In the present action, as set out earlier, P has succeeded in claiming damages for Ds’ breach of duties as employees.  P elected not to seek an account for secret profits or monies received by Ds.

236.  The damages awarded to P arose out of contractual relationship of employer and employee and based on the differences paid by P and the amounts quoted by the suppliers to Ds, and it was not based on the actual sums received by Ds.

237.  Mr Leung referred this Court to China Everbright-IHD Pacific Ltd v Ch’ng Poh HCA 12873/1995, unreported judgment 27 February 2001.  In that case, the causes of actions included conspiracy, conversion and breach of fiduciary duties.  Yuen J, as she then was, ordered compound interest on monthly rests.

238.  The case eventually went all the way to the Court of Final Appeal, namely China Everbright-IHD Pacific Ltd v Ch’ng Poh (2002) 5 HKCFAR 630.  It was accepted by the Court of Final Appeal that there was equitable jurisdiction to award compound interest in cases of fraud.  Having accepted this, Lord Millett NPJ however and pointed out that the law of England at the time in relation to the award of interest had developed in a fragmentary and unsatisfactory manner, and that the refusal of English law to award compound interest at common law in cases of fraud while making such an award as a matter of course in equity was very difficult to defend[112].  Lord Millet NPJ had suggested, obiter, that the courts of Hong Kong should consider abandoning the stance of the common law against awarding compound interest, but said the question did not arise for decision in the case before him[113].

239.  Since then, there has been no subsequent decision by the Court of Final Appeal adopting Lord Millett’s proposal.

240.  In England, there have however been further developments.  The House of Lords held in Sempra Metals Ltd (formerly Metallgesellchaft Ltd) v Inland Revenue Commissioners and another [2007] UKHL 34, amongst other things, that in principle it wold always be open to a claimant to plead and prove his actual interest losses caused by late payment of a debt; that those losses might include an element of compound interest; that such losses would be subject to the principles governing all claims for damages for breach of contract, such as remoteness and failure to mitigate; and that, accordingly, the courts had a common law jurisdiction to award interest, simple and compound, as damages on claims for non-payment of debts as well as on other claims for breach of contract and tort[114].

241.  The Sempra case has been followed in a recent decision of DHCJ Sir Richard Field in Joe Zhiziong Shou and Saif Partners II L P & Anor, [2018] HKCFI 357, HCCL 16/2016 (unreported) judgment dated 14 February 2018.

242.  In the present case, as mentioned earlier, in the re-amended statement of claim, P only sought interest generally pursuant to the Court’s equitable jurisdiction and or s 48 of the High Court Ordinance. There was no specific claim for compound interest pleaded.  Further, there were no particulars pleaded as to any actual interest losses caused by Ds’ misconduct or suffered by P.  I am of the view that, whether under the Court’s equitable jurisdiction or under common law, a claim for compound interest should be pleaded.

243.  Having considered the above, I decline to order compound interest.  P had also pleaded interest generally under s 48 of the High Court Ordinance.  Apart from seeking compound interest, there was no other submission on interest.

244.  Having considered all the circumstances of the case, I am only prepared to order pre-judgment interest at commercial rate from date of issue of writ, until date of judgment and thereafter at judgment rate, until payment.

Conclusion 

245.  The effect of my order is as follows:

(i)   Ds do pay P, jointly and severally, the sum of USD893,142.60 or its equivalent in HKD for damages arising out of Ds’ breach of duties as P’s employees;

(ii)   The sum in (i) will carry pre-judgment interest at commercial rate from issue of writ until date of judgment and at judgment rate from date of judgment until date of payment by Ds;

(iii)   D1’s counterclaim be dismissed.

246.  As for costs, P sought indemnity costs of the trial to be paid by Ds and save for the trial, all other costs of this action, including those previously reserved be paid by Ds to P on party and party basis to be taxed if not agreed.  Mr Leung submitted that Ds’ liability is unarguable and further Mrs Townsend’s witness statement was provided to Ds back in 2015 and yet no action was taken by Ds to attempt to agree to any items or to provide their own supporting evidence.  As a result, the trial was unnecessarily lengthened.

247.  Although Ds’ liability is unarguable, P did again rely on the Employment Contract and on the 04.05.07 Letter and did not succeed.  Further, P had to prove its case on quantum.  The original estimated length of trial was 5 days.  The trial eventually lasted 9 days.

248.  Having considered all the circumstances of this case, I accept that the trial was unnecessarily lengthened by Ds’ conduct and/or uncompromising attitude during the trial.  I am prepared to order Ds to jointly and severally pay P’s costs of the trial after 7 August 2017 until conclusion of trial on indemnity basis.  Save for this, Ds are to pay all other costs of this action including any reserved costs to P and costs for written submissions on party and party basis to be taxed if not agreed.