Pao on and Others v. Lau Yiu Long and Another

HCA001159/1975

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO. 1159 OF 1975

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Coram: LI, J. in Court

Date of Judgment: 17th February, 1976 at 9.36 a.m.

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JUDGMENT

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1. This is an action for breach of a guarantee and indemnity dated 4th May 1973 (hereinafter referred to as the guarantee). The dispute arises from a transfer of shares in a takeover bid between the Fu Chip Investment Co. Ltd. (hereinafter referred to as the Fu Chip) and the Tsuen Wan Shing On Estate Co. Ltd. (hereinafter referred to as the Shing On) in February 1973. At that time the plaintiffs Pau On, Ho Mei Chun and Pau Lap Chung (hereinafter referred to respectively as the 1st plaintiff, 2nd plaintiff, and the 3rd plaintiff) together owned all the shares in the Shing On. On the 27th February 1973 by an agreement in writing (hereinafter referred to as the main agreement) Exhibit C between the three plaintiffs of the first part, the Shing On of the 2nd part and the Fu Chip of the 3rd part the three plaintiffs agreed to sell and the Fu Chip agreed to buy all the plaintiffs' shares in the Shing On for $10.5 million to be paid in the form of 4.2 million of the Fu Chip shares of $1.00 each to be valued at $2.50 and allotted by the Fu Chip. The date of completion was set for the 31st March 1973. At the time the Fu Chip was a public company the shares of which had been listed in the Far East Stock Exchange for trading. The 4.2 million shares to be allotted would be new issues for the purpose of the taking over of the Shing On. Under the main agreement the three plaintiffs also covenanted not to sell or transfer 60% of the said Fu Chip shares so allotted to them on or before April 1974. On the same day (that is 27th February 1973) by another agreement (hereinafter referred to as the subsidiary agreement) between the three plaintiffs and the 1st defendant the plaintiffs agreed to sell and the 1st defendant to buy 2,520,000 shares of the Fu Chip (that is the 60% of the Fu Chip shares allotted to the plaintiffs under the main agreement) at the price of $2.50 each i.e. total of 6.3 million and that the completion should take place on or before 30th April 1974. Later, by mutual consent, the completion date of the main agreement was postponed to the 30th April 1973.

2. There is a dispute as to the terms of the subsidiary agreement which dispute is part of the plaintiffs' case and I shall refer to it later. In the meanwhile the Fu Chip notified the Far East Stock Exchange Ltd. of the execution of the main agreement and applied for permission to deal in and for quotation of the new allottment of 4.2 million shares to be allotted to the plaintiffs. The Fu Chip also published an announcement of the main agreement as well as the application. It is observed that in the said announcement the Fu Chip published not only the acquisition of the shares of the Shing On but also the acquisition of other properties for which the Fu Chip shares were allotted and the applications to the Far East Exchange Ltd. for dealings in all such Fu Chip shares. On the 31st March the Far East Stock Exchange Ltd. approved the above mentioned application in respect of the 4.2 million shares to be allotted to the plaintiffs.

3. On 19th April 1973 Yung, Yu, Yuen & Co., solicitors for the Fu Chip started to press the Shing On for the completion of the main agreement. This led to an exchange of correspondence between Yung, Yu, Yuen & Co., and Hasting & Co. then solicitors for the Shing On. Eventually the main agreement was completed on 4th May 1973 but not after the subsidiary agreement had been cancelled and the guarantee in Exhibit B executed by the 1st defendant and 2nd defendant on the same day. In the guarantee 1st defendant and the 2nd defendant quaranteed that the price of the said 2,520,000 Fu Chip shares would not fall below $2.50 each on the marketing day immediately following the 30th April 1974 and agreed to indemnify the plaintiffs if the price fell below that mark on the said date. On the 1st May 1974 the market price of the Fu Chip shares quoted at the Exchange was at 36 each. The difference in price for the 2,520,000 shares (that is 60%) of the Fu Chip shares so retained by the plaintiffs as covenanted in the main agreement between the market price and the guaranteed price of $2.50 each is $5,392,800. The aforesaid details are the background of this action and are not in serious dispute. The substantial difference between the parties are the circumstances under which the guarantee came into being on the 4th May 1973 and the consequences thereof.

4. By their pleadings the plaintiffs' case is that prior to the execution of the main agreement and the subsidiary agreement the parties had negotiations in mid February 1973 when it was orally agreed between the plaintiffs and the defendants that in consideration of the plaintiffs selling to the Fu Chip all of the plaintiffs' shares in the Shing On for the sum of $10.5 million to be satisfied by the allottment of 4.2 million shares of $1.00 each in the Fu Chip, the defendants guaranteed that the closing market value on the following marketing date immediately after the 30th April 1974 for the 2,520,000 shares of the 4.2 million shares so allotted to the plaintiffs should not be less than $2.50 per share and agreed to indemnify the plaintiffs in respect of the said 2,520,000 shares against any loss, damage and other expenses which the plaintiffs might incur or sustain in the event of the closing market price of the Fu Chip shares falling short of $2.50 each on the marketing day following the 30th April 1974. Then they gave instructions to the solicitors to reduce the agreements into writing.

5. It is contended by the plaintiffs that, whilst the agreement was executed by them in the presence of the two defendants after the gist of the contents were explained to them by a friend who was a solicitor's clerk, the subsidiary agreement was executed by them without any explanation but on the information preferred by the 1st defendant that it contained the guarantee and indemnity as agreed orally between them in mid February 1973. The plaintiffs all signed the subsidiary agreement without reading the documents believing that it contained the guarantee and indemnity as orally in the terms as orally agreed. The subsidiary agreement was in fact one of sale and purchase whereby the plaintiffs agreed to sell 2,520,000 of the Fu Chip shares to the 1st defendant for $6.3 million, the completion to take place on or before the 30th April. The plaintiffs were never given a copy of either the main agreement or the subsidiary agreement until April 1973 when the plaintiffs discovered the discrepancy of the subsidiary agreement from the oral agreement of mid February 1973. Negotiation ensued and as a result, the defendants signed on the 4th May 1973 a document in the terms of the said oral agreement in mid February 1973 in consideration of the cancellation of the subsidiary agreement.

6. Alternatively, the plaintiffs claim that the defendants signed the guarantee in consideration of the plaintiffs giving a written undertaking to the defendants that the plaintiffs would retain, for one year, 60% of the Fu Chip shares to be allotted to them, would indemnify the defendants of any loss or damages caused by their breach of this undertaking and would give the defendants the option of purchasing the 60% of such Fu Chip shares upon the happening of certain events.

7. Further and in the alternative the plaintiffs claim that the said guarantee was signed by the defendants in consideration of the plaintiffs performing their obligations to the Fu Chip on the 4th May 1973 under the main agreement. The plaintiffs further contend alternatively that if the said agreement is invalid then the defendants are still bound by the subsidiary agreement.

8. On the aforesaid grounds the plaintiffs now claim the total sum of $5,392,800 the deference between $6.3 million being the price of the 2,520,000 shares of the Fu Chip calculated at $2.50 each and $907,200 being the price of the same calculated at 36 each, the market value of such shares on the 1st May 1974.

9. The defence is that there had been no such oral agreement between the parties in mid February 1973 as alleged by the plaintiffs. Both the main agreement and the subsidiary agreement were signed by the plaintiffs on the 27th February 1973 at the office premises of Wing On Co. after the plaintiffs had perused the same and after one Chow Hin Yau had explained the contents of the same to the plaintiffs at lunch in the Golden City Restaurant on the same day. Both the main and subsidiary agreements represented what were agreed upon by the parties thereto. One of the terms of the main agreement was that each of the plaintiffs must retain in their own right 60% of the shares of the Fu Chip to be allotted to him and not to sell the same on or before the 30th April 1974. By the subsidiary agreement the plaintiffs agreed to sell and the 1st defendant to buy the said 60% of the Fu Chip shares so retained by the plaintiffs at $2.50, that is the 2,520,000 Fu Chip shares for $6.3 million and that the said sale and purchase for the said shares should be completed on or before the 30th April 1974. On or about 27th February 1973 the Fu Chip notified the Far East Exchange Ltd. of the execution of the main agreement and applied to list the shares to be allotted to the plaintiffs for trading. On the 16th March the Fu Chip made a public announcement that it had agreed to purchase all the issued shares in the Shing On. On or about the 28th March the date for completion under the main agreement was extended by consent of the parties to the 30th April 1973. On or about the 31st March 1974 the said application by the Fu Chip was approved by the Far East Stock Exchange Ltd.

10. On or about the 24th April 1973 the 1st defendant explained to the 1st plaintiff the importance of the plaintiffs completing the transaction in the main agreement. Thereupon the 1st plaintiff alleged that the subsidiary agreement did not represent what had been orally agreed between the plaintiffs and the defendants in that the plaintiffs never agreed to sell to the 1st defendant the said 2,520,000 shares in the Fu Chip as set out in the subsidiary agreement. The 1st plaintiff further required a guarantee from the defendants that the price in respect of the said 2,520,000 Fu Chip shares would not be less than $2.50 each for one year and said that unless such a guarantee was forthcoming the plaintiffs would refuse to sell the Shing On shares to the Fu Chip. On or about the 1st May 1973 the 1st defendant again impressed upon the 1st plaintiff the importance of the plaintiffs completing the transaction with the Fu Chip and that, in view of the Fu Chip's application to the Far East Stock Exchange Ltd. and the said public announcement made by the Fu Chip on the 16th March 1973 to that effect, the failure on the part of the plaintiffs to complete the said transaction would cause the public to lose confidence in the Fu Chip shares.

11. On the 3rd May 1973, Mr. Chan Kwai Wah, the plaintiffs' agent, met the 1st defendant and repeated the same demand and the same threat that unless the guarantee was forthcoming the plaintiffs would refuse to complete the transaction with the Fu Chip under the main agreement. It was under such threat that the defendants signed the guarantee.

12. In the premises the defendants contend that the said guarantee was signed by the defendants under an unlawful threat to repudiate the main agreement administered by the plaintiffs who knew well of the detrimental effect of such repudiation on the market price of the Fu Chip shares. As such the said guarantee is null and void and unenforceable. In the alternative it is contended that the said guarantee was given for a past consideration. It is denied that the defendants gave the said guarantee in consideration of the plaintiffs giving the defendants a written undertaking to retain 60% of the Fu Chip shares to be allotted to them under the main agreement and the option referred to in the plaintiffs' Statement of Claim. It is further contended that the subsidiary agreement which had been cancelled by mutual consent cannot be revived simply because of the said guarantee being invalid and that the plaintiffs are estopped from relying on the subsidiary agreement because it had been cancelled and because of the plaintiffs' own refusal to abide by its terms.

13. Joining issue with the defendants in their Reply the plaintiffs deny any conversation on or about the 24th April 1973. The plaintiffs also deny that the 1st defendant mentioned the adverse effect of the plaintiffs' failure to complete the main agreement on public confidence in the Fu Chip. They further allege that on the 1st May the 1st plaintiff did say that the plaintiffs were prepared to complete the transaction under the main agreement only if the defendants would provide the plaintiffs with a guarantee and indemnity in accordance with the oral agreement. Thereupon the 1st defendant admitted that there was a mistake in the subsidiary agreement and that the defendants were prepared to give to the plaintiffs a guarantee and indemnity which would be prepared by Yung, Yu, Yuen & Co. Chan Kwai Wah, the plaintiff's agent, merely repeated the request of the said guarantee in terms of the oral agreement and inquired when such guarantee would be given. As a result the defendants gave the guarantee freely and were under no threat. Finally it is contended that by signing the said guarantee the defendants had represented to the plaintiffs that it was valid. Acting on such representation the plaintiffs agreed to the cancellation of the subsidiary agreement thereby changing their position to their detriment. As such the defendants are estopped from alleging that the said guarantee is ineffective or invalid.

14. Despite the multiplicity of alternative issues of law and facts raised in the pleadings, the ultimate question still is whether the guarantee is binding on the defendants. Further such alternative issues depend largely on the facts of the case. Before an answer for the ultimate question can be found it is necessary first to consider the evidence in order to dispose of the alternative issues.

15. One of the issues raised is that sometime in mid February 1973 the parties had reached an oral agreement to the effect as pleaded in paragraph 2 of the Statement of Claim. The plaintiffs allege that the guarantee was signed on the 4th May 1973 in order to give effect to the said oral agreement since the subsidiary agreement, Exhibit B, was never read by or explained to the plaintiffs before they signed it and as such never represented the true intention of the parties as expressed in the said oral agreement.

16. According to the 2nd plaintiff there had been negotiations between the plaintiffs and the defendants on five separate occasions over a period of 9 days immediately preceding the 22nd February when they reached the said oral agreement. There and then the 1st plaintiff and the 2nd plaintiff went with the defendants to see Mr. Philip Yuen of Yung, Yu, Yuen & Co. their solicitors (then for both parties) to give instructions personally for reducing the said oral agreement into writing. They told Mr. Yuen that the Fu Chip was to take over the Shing On by allottment to the plaintiffs of 4.2 million Fu Chip shares valued at $2.50 each and that there should be a guarantee given by the defendants and the Fu Chip that 60% of the 4.2 million Fu Chip shares so allotted would not fall in value to below $2.50 each for one year after the transaction and that the defendants and the Fu Chip would pay the difference between $2.50 and the market price of the Fu Chip shares on the marketing day immediately following the 30th April 1974 if the Fu Chip shares should fall below the value of $2.50 each. On the other hand the 1st defendant demanded that the plaintiffs would not sell the 2,520,000 of the 4.2 million shares within one year or that the plaintiffs would have to compensate the defendants and the Fu Chip for any loss. At around noon on the 27th February the 1st defendant rang the plaintiffs for an appointment to go to tea at the Golden City Restaurant without mentioning the purpose for such a meeting. All the three plaintiffs went bringing with them a solicitor's clerk by the name of Chow Hin Yau. Mr. Chow was a clerk to Hastings & Co. who were then solicitors advising the Shing On. On their arrival they saw only the 1st defendant with a group of the 1st defendant's friends.

17. At the lunch table the 1st defendant produced a copy of the main agreement for their perusal. Mr. Chow then explained to the plaintiffs the gist of the contents of the main agreement and left the party at about 2 p.m. The subsidiary agreement was not produced to the plaintiffs until the parties had finished lunch and were down at the lobby of the Golden City Restaurant. It was produced by the 2nd defendant who did not appear until then. The defendants represented to the plaintiffs that the subsidiary agreement, Exhibit A7-9 was the document of mutual guarantee. No one was there to explain the contents of the subsidiary agreement to the plaintiffs. The plaintiffs did not know English. By that time Chow Hin Yau had left. The plaintiffs signed the subsidiary agreement believing it to be a document of mutual guarantee and in accordance with their oral agreement. Then both the main agreement and the subsidiary agreements were taken away from the plaintiffs who were not given a copy thereof until sometime near the end of April. It is, however, the 2nd plaintiff's evidence that on the 28th March 1973 the 1st defendant took the main agreement only to the plaintiffs' office for their signature for a postponement of the completion date to the 30th April 1973. Again no copy of any agreement was given to the plaintiffs. It was near the end of April when the plaintiffs obtained a copy of the 2 agreements that they found out that the subsidiary agreement was not a document of guarantee but an agreement of purchase and sales.

18. The defence evidence on this point is that there was no oral agreement as alleged by the plaintiffs. Between the 12th February 1973 and 19th February 1973 the 1st defendant was in Taiwan. On the 20th or 21st of February 1973 the 1st plaintiff first indioated to the 1st defendant that he, the 1st plaintiff, was interested in the Shing On being taken over by the Fu Chip. On the 23rd February 1973 the Fu Chip shares were listed on the Far East Stock Exchange for dealing for the first day. On that day the 1st defendant went to the 1st plaintiff's share-brokers firm, the Wing On Company, to watch the market. The 1st defendant bought a fair number of the Fu Chip shares on that day to support the prices of the Fu Chip shares - see Exhibit E, the bought notes. The question of taking over the Shing On was then revived at the closing of the market for the day. The parties negotiated and bargained over the terms of the take-over several times during the following few days. There was mention as to the form of the guarantee for the value of the Fu Chip shares to be allotted to the plaintiffs in consideration of the take-over of the Shing On. The 1st defendant offered to sign an agreement to buy back 60% of the shares which the plaintiffs were obliged to retain for one year after the completion of the main agreement at the price of $2.50. This was acceptable to the plaintiffs. The 1st plaintiff and 1st defendant went to see Mr. Yau, a conveyancing clerk in Yung, Yu, Yuen & Company to give instructions for drawing up their agreement. In the presence of the 1st plaintiff the 1st defendant gave instructions to Yau who later repeated such instructions to the parties. Both raised no objection. Yau indicated that the agreement would be ready by the following day, The 1st defendant suggested that the parties should sign the agreement at Yung, Yu, Yuen & Company. However the 1st plaintiff suggested that the 1st defendant should meet him before 1 p.m. at the Golden City Restaurant 4th floor for tea the next day and sign the agreements so that he could show them to Chow Hin Yau of Hastings.

19. On the morning of the 27th February 1973 the defendants collected two copies each of the main agreement and the subsidiary agreement in escrow and took them to meet the plaintiffs at the Golden City Restaurant. All the four copies were handed to the 1st plaintiff who asked Chow to explain the contents to him which Chow did. But the agreement was not signed there. The parties then went back to the Wing On Company where the documents were handed to Mr. Chan Kwai Wah who explained generally the outline of the two documents to the plaintiffs who then signed both the main agreement and the subsidiary agreement. The 1st defendant identified Exhibit C as one of the two originals of the main agreement to which the Shing On seal was applied and which was signed by the plaintiffs and the defendants. As to the extension endorsement it was signed on or about the 27th March 1973 at the Yung, Yu, Yuen & Company before Mr. Yau.

20. In view of the evidence it is obvious that the parties could not have reached any oral agreement before the 23rd February 1973. The 1st defendant was away from Hong Kong until 19th February 1973. In any event there was no market price for the Fu Chip shares to form the basis of any bargain before the 23rd February 1973 when such shares were first put on the open market. The 2nd plaintiff's evidence that the parties reached agreement before the 22nd February 1973 and went to Yung, Yu, Yuen & Company to give instructions to reduce the agreement into writing is not reliable. The 2nd plaintiff's only explanation for fixing the price of the Fu Chip shares at $2.50 each, which is that the 1st defendant simply fixed a price at that level, appears to me to be far fetched. She frankly admitted that she could not remember if the price for the Fu Chip shares were agreed at $2.50 each only on the 23rd February 1973 and said in cross-examination that it was after the Fu Chip shares were listed before any discussion of the take-over began. This is in direct conflict with her evidence-in-chief and reflects upon the credibility of the 2nd plaintiff's evidence though it is by no means decisive on the question whether there was an oral agreement in terms as alleged by the plaintiffs. Even the 1st defendant's evidence is that prior to the 27th February 1973 the parties had come to terms which were reduced into writing. In his evidence-in-chief the 1st defendant told of their discussion on the 26th February 1973 as follows:-

"On following Monday, 26/2/73 we met. We talked about the price. I first offered $8.5 million. They declined. Mrs. Pao wanted $11 million. I refused because even figure they worked out was only $10.8 million. Then Mrs. Pao suggested $10.8 million. Backling took place and eventually agreed upon figure of $10.5 million and that payment to be made by allocation of shares valued at $2.50 each. It took only half an hour to reach this agreement. I was anxious to acquire and they were anxious to sell. After agreement reached Mrs. Pao told me she had licence as stock broker and in future we could join to be banker in a game. At that time we were all in high spirits. We met again that afternoon to talk of details of the transaction. I suggested that the shares allocated to them should not be sold for 1 year as to 60%. I have them the reason - that as major shareholder they must support the shares. They were well pleased saying that we were in the same boat and hope the boat would float. Then Mrs. Pao asked what happened if the shares dropped below $2.50. I said I would sign an $2.50 after 1 year. Both Mr. and Mrs. Pao agreed. Then Pao and I went to see Mr. Yau at Yung, Yu, Yuen & Company. I gave an account to Yau of the take-over by the Fu Chip of Shing On Company. Yau was instructed to prepare two agreements - one for taking over of Shing On by Fu Chip by issuing 4.2 million shares of Fu Chip to acquire all shares of Shing On Company."

21. It is obvious that the parties could not have had any negotiation at a time nine days prior to the 22nd February 1973. It has been proved conclusively that the 1st defendant was in Taiwan during that period up to the 19th February 1973. I believe that the parties did not start negotiation until the 23rd February 1973 when the Fu Chip shares were first traded in the Far East Stock Exchange.

22. The 1st defendant went on to tell of the circumstances under which the main agreement and the subsidiary agreement were signed as follows:-

23. I am inclined to believe that the 1st defendant's account is accurate to the extent that in the course of the discussion the plaintiffs did not object to the 1st defendant's offer to purchase their retained shares as a sufficient form of guarantee and that such instructions were given to draft the subsidiary agreement to Mr. Yau of Yung, Yu, Yuen and Company rather than to Mr. Yuen himself. It is not part of the plaintiffs' case that either Mr. Yuen or his clerk, Mr. Yau, was negligent. No solicitor worthy of his profession would produce a draft agreement of sales as is the subsidiary agreement while instructions were given to draft a guarantee. Mr. Yau frankly admitted that he merely used the printed standard form of sales for the subsidiary agreement. This accounts for the conflict between the terms of the main agreement and the terms of the subsidiary agreement. In the main agreement the plaintiffs covenanted with the Fu Chip that they would not sell or dispose of 60% of the Fu Chip shares allotted to them within one year of the completion of the transaction. In the subsidiary agreement the plaintiffs agreed to sell 60% of the said shares to the 1st defendant within one year of the completion of the transaction under the main agreement. In the preparation of the subsidiary agreement both the plaintiffs and the defendants were the clients of Yung, Yu, Yuen & Co. I do not believe that any solicitor would so deliberately favour one of his clients to the detriment of the other as to include terms as harsh and prejudicial as those in the subsidiary agreement. Clause I of the subsidiary agreement provides that:

"1. The Seller shall sell to the Buyer and the Buyer shall buy from the Seller free from all incumbrances the said shares in the said Company together with all dividends bonus and issues, if any, accrued or to accrue thereon whether accrued before or after the signing of this Agreement."

24. Having heard the evidence of the 2nd plaintiff and the 1st defendant and having seen them in Court I form the opinion that both are fairly sharp business people each trying to get a better bargain over the other in the take-over negotiation. However, the 1st defendant is of a slightly more sophisticated type. As such he was able to obtain an advantage over the plaintiffs by getting them to agree to the form of transaction as contained in the main agreement and the subsidiary agreement - a transaction he said he would not have entered had he been in the plaintiff's place. I find as a fact that in the course of their negotiation the plaintiffs inquired as to the form of protection they would be given for agreeing to retain 60% of the Fu Chip shares allotted to them under the main agreement for at least one year. Thereupon the 1st defendant offered to repurchase the said shares from them at $2.50 each at the end of the year. The plaintiffs agreed in principle to this form of safeguard. It was in such circumstances that the 1st plaintiff and the 1st defendant went to give instructions to Mr. Yau of Yung, Yu, Yuen & Co. I am satisfied that everything leading to and including the preparation of the draft agreement were done in a rush. No one including Mr. Yau paid much attention to the legal refinements or the unreasonableness of some of the provisions in the draft subsidiary agreement. However, I am satisfied that at the material time the plaintiffs knew that the subsidiary agreement which they signed would take the form of a sale and purchase agreement.

25. The 2nd plaintiff's evidence as to the circumstances under which they signed the main and subsidiary agreements were full of embellishments. Her evidence is not reliable. I am satisfied that it was her husband, the 1st plaintiff who suggested that the documents should be taken to the Golden City Restaurant for execution. That was the plaintiff's usual place for lunch. There he could bring his friend and a trusted solicitor's clerk, Mr. Chow Hin Yau, to read the documents in draft without causing embarrassment of bringin Mr. Chow to Yung, Yu, Yuen & Co. I cannot accept the plaintiffs' evidence that Mr. Chow went to the Golden City Restaurant without knowing that his assistance was required on that occasion. As to the signing of the subsidiary agreement I accept the evidence given by the 1st defendant, that the draft copies of both the main agreement and the subsidiary agreement were handed to the plaintiffs for perusal that Chow Min Yau had read and explained the gist of the contents of both draft agreements to the plaintiffs and that the main agreement was signed and sealed at the same time as the subsidiary agreement was signed at the Wing On Company after the plaintiffs' employee Chan Kwai Wah had read through the drafts. The two drafts were prepared by the same person. Mr. Yau, after instructions were given to him at the same time the previous day. Both drafts related to the take over transaction of the Shing On. By their own pleadings the plaintiffs allege that they signed the main agreement at the Golden City Restaurant in the presence of both defendants. This is in conflict with the 2nd plaintiff's evidence that the 2nd defendant was absont when they signed the main agreement. There is another reason which leads me to reject the plaintiff's evidence that they never read the draft agreements before signing them. The 2nd plaintiff maintained that after the documents were signed both the main agreement and the subsidiary agreement were taken away from them by them defendants on the 27th February 1973. At that time the seal of the Shing On had not been applied to the main agreement. Yet one of the originals of the main agreement - Exhibit C2 - which was forwarded to the Far East Stock Exchange on the 27th February 1973 had the seal of Shing On applied to it. Another copy of the original main agreement - Exhibit C1 - which had been kept in the office of Charles Marfan since early March 1973 also bore the Shing On seal. The Shing On seal was at all material times in the possession of the plaintiffs up to the 4th May 1973. This lends support to the 1st defendant's evidence that the main agreement was signed and sealed in the Wing On Company on the 27th February 1973. On the balance of probability I also believe that the subsidiary agreement was signed by the parties in the same place and in the same manner by the parties as alleged by the 1st defendant.

26. Having found that the plaintiffs signed the subsidiary agreement with full knowledge of the nature of its contents there is no room for doubt that the alleged oral agreement as set out in para.2 of the Statement of Claim never existed. Had there been such an oral agreement the plaintiffs would have raised an objection before they signed the subsidiary agreement. There is also no merit in the plaintiff's claim that the guarantee was signed on the 4th May 1973 to give effect to the true intention of the parties as expressed in the alleged oral agreement or in rectification of a mistake.

27. There is no necessity to decide on the validity of the subsidiary agreement. It has been cancelled by mutual consent. It is sufficient to say that if the plaintiffs repudiated the subsidiary agreement solely on the ground that it did not represent the true intention of the parties or of non est factum the plaintiff must fail for the reasons I have given.

28. I will now consider the evidence on the circumstances leading to the signing of the guarantee. The plaintiff's evidence is that the 1st plaintiff left for Taiwan on the 18th April 1973. Shortly after that Mr. Chow Hin Yau of Hastings who looked after the property of the Shing On telephoned the 2nd plaintiff and informed her of a letter from Yung, Yu, Yuen & Co. which reads:

29. The 2nd plaintiff informed Chow that she had not received the guarantee from the defendants. As a result Chow wrote in reply in the following terms:

At the same time she sent her employee Chan Kwai Wah to go to collect a copy of what she called "the mutual guarantee". Chan returned with a copy of the subsidiary agreement. The 2nd plaintiff said that that was the first time she set eyes on the contents of this document which was explained to her. Nothing was done until the 1st plaintiff returned from Taiwan on the 29th April 1973 and all papers were handed to him. The 1st plaintiff took the matter up with the 1st defendant. The 1st plaintiff's attitude was that unless a guarantee and indemnity for the price of the 2,520,000 Fu Chip shares was given by the defendants the plaintiffs would not complete the main agreement with the Fu Chip. On a day between the 30th April 1973 and the 3rd May 1973 the 1st defendant agreed to make a fresh arrangement. As a result the guarantee was approved in draft between Chow Hin Yau of Hastings on their behalf and Yung, Yu, Yuen & Co. on behalf of the defendants. In the afternoon on the 4th May 1973 they all went to Yung, Yu, Yuen & Co. and signed the documents. The plaintiffs and the defendants signed for the cancellation of the subsidiary agreement Exhibit The plaintiffs signed a guarantee and indemnity - Exhibit A-39 and the defendants signed the guarantee - Exhibit A-37-38. The 2nd plaintiff can't remember the exact sequence of the documents being signed but says that they were signed one after another. Then the parties went to the office of Charles Marfan to complete the transaction under the main agreement.

30. The defence evidence is that after the main agreement and the subsidiary agreement were signed on the 27th February 1973 he took them back to the office of Yung, Yu, Yuen & Co. He caused copies of the main agreement to be sent to Charles Marfan & Co., the Fu Chip's secretary and to the Far East Stock Exchange in connection with the Fu Chip's application for listing the new Fu Chip shares. On the 31st March 1973 the Far East Stock Exchange Ltd. approved the listing of the new shares. On the 2nd April 1973 the 1st defendant telephoned the 2nd plaintiff to inform her of the approval and asked the plaintiffs to complete the transaction with the Fu Chip. The 2nd plaintiff stated that her husband was still thinking over the matter. Since then the plaintiffs continued to avoid an answer on the excuse that the 1st plaintiff was away. On the 16th April 1973 the 1st defendant telephoned the 2nd plaintiff on the same subject. When the 2nd plaintiff asked for a guarantee as to the Fu Chip shares which the plaintiff agreed to retain for one year under the main agreement. This dispute continued in correspondence between the parties' solicitors until the 4th May 1973 when the draft guarantee was agreeable to both parties. The defendants agreed to give the guarantee solely because the plaintiffs threatened to repudiate the main agreement with the Fu Chip. The parties signed the cancellation of the subsidiary agreement first, then the guarantee. There was a further dispute as to how the plaintiffs could ensure that they would not dispose of the 60% of the Fu Chip shares to be allotted to them. This resulted in the signing of another document by the plaintiffs to indemnify the defendants should they (the Plaintiffs) dispose of the said Fu Chip shares in breach of the main agreement.

31. I have already found that there was no oral agreement between the parties in mid February 1973 for a guarantee to be given by the defendants and that the plaintiffs knew of the nature of the subsidiary agreement. There is nothing to form the basis of the plaintiff's demand for the guarantee as told in the 2nd plaintiff's evidence. Exhibit 21 was written by Chow Hin Yau on instructions of the 2nd plaintiff. Had there been an oral agreement as alleged Mr. Chow would have written for a guarantee of 60% only of the shares so allotted to the plaintiffs and not for 100% of them. Mr. Chow said that the 2nd plaintiff gave the figure to him before he wrote Exhibit 21. I find as a fact that the only reason why the plaintiffs asked for a guarantee in April 1973 is that they realised by then that they had not obtained a good bargain after all. That probably is the reason for the Plaintiffs' change of attitude in April 1973. The evidence is that both parties were keen to go through the transactions at the time the main agreement was signed. There is also evidence that by early April the 1st plaintiff had known of the approval to deal in the Fu Chip shares to be allotted to the plaintiffs by the Far East Stock Exchange. His departure for Taiwan before the completion of the main agreement is difficult to under-stand. In this connection I find the 2nd plaintiff's evidence that the 1st defendant did not inform the plaintiffs of the said approval in April illogical and unsatisfactory.

32. There is also evidence that both the plaintiffs and the defendants were optimistic about the price of the Fu Chip shares. In fact the feeling was such that it was better to hold shares than cash. Although the price of the Fu Chip shares suffered a slight set back in late April 1973 it was considered that that was in sympathy with the general market. At that time the plaintiffs and the defendants could not have foreseen that the market, including the Fu Chip shares would continue to slump to such an extent as was found in the latter part of 1973. The 1st plaintiff's decision to go to Taiwan was made probably in order to play for time and to enable the 2nd plaintiff to start a new bargain. No reason was given for the necessity of his Taiwan trip. It is more inexplicable why he should leave at a time when it was essential for him to remain in Hong Kong to complete the main agreement with the Fu Chip. He knew by that time an announcement of the acquisition by the Fu Chip of the Shing On shares had been made to the public. He knew also that the defendants were anxious to see to that the Fu Chip completing the transaction. He knew that the longer the defendants had to wait the better bargaining power he would have in his hand. In short he knew he had the upper hand over the defendants who would have to agree even if he wanted something more than the original bargain viz: the subsidiary agreement. In my opinion his threat of refusing to complete was, for the plaintiffs, a good starting point for a new bargain and his temporary absence a very shrewd move.

33. It is not necessary for me to decide on the sequence in which the guarantee, the cancellation of the subsidiary agreement and the indemnity, Exhibit A-39, were signed. The 2nd plaintiff's evidence on this point is hazy. The defence evidence is that the cancellation of the subsidiary agreement was signed first. However, subject to the question of admissibility of extrinsic evidence, a question I shall deal with later, I am of the opinion that the guarantee was signed by the defendants solely to induce the plaintiffs to complete the main transaction and nothing else. Had the indemnity, Exhibit A-39, been a consideration for the guarantee it would have been included in the text of the guarantee in however general a term. It will be observed that the draft of the guarantee had been through the hands of solicitors' clerks at least 3 or 4 times and was finally submitted to a solicitor who had read and explained it to the parties before execution. On this point I am inclined to accept the 1st defendant's evidence that the indemnity, Exhibit A-39, was signed by the plaintiffs on a subsequent demand by the defendants after the guarantee had been signed. As to the cancellation it is the plaintiffs' own evidence that it was cancelled for one reason and one reason alone viz: it did not represent their true intention. The guarantee was to replace it.

34. It remains for me to consider how in fact this alleged threat on the part of the plaintiffs affected the defendants. That the defendants were thoroughly disgruntled is beyond doubt. Because of the plaintiffs' change they had to give up what they considered to be a very good bargain in the subsidiary agreement. In its place they were asked to sign a guarantee as to the price of a block of shares in the Fu Chip. In this way they could gain nothing even if the price should go up. At the time the main agreement was signed the parties were optimistic as well as enthusiastic. In the words of the 1st defendant the plaintiffs were hoping to "play bank" together with him on the Fu Chip shares - meaning controlling the market of such shares by buying and selling. There was some evidence that the price of the Fu Chip shares in April was not as high as it was in February or March 1973. But the price for such shares was still much higher than its normal value of $1.00 each. Further the 1st defendant was still fairly confident. In cross-examination he said: "I continued to buy the Fu Chip shares to support the price. I knew the Fu Chip shares were not worth $3.00 each then. But in those days it was a blind chase." The 1st defendant frankly admitted that in February and March he purchased a lot of the Fu Chip shares in order to push up the price and then resell at a profit.

35. In answer to questions in cross-examination about the price movements of the Fu Chip shares the 1st defendant said:

36. As to his reaction to the plaintiffs' threat to refuse completing the main agreement the 1st defendant said in cross-examination:-

37. These words reflect the optimism and hope of the 1st defendant when he yielded to the plaintiffs' demand for a guarantee. At the time the demand was made the 1st defendant placed the matter in the hands of his solicitors. He had proper legal advice. He knew very well whether he gave the guarantee or not the main agreement between the Fu Chip and the plaintiffs was still valid as a separate document. The Fu Chip could have sued the plaintiffs for specific performance or for damages. Out of the original issued and paid up capital of 12,600,000 shares in the Fu Chip the 1st defendant owned 6,531,000 shares (see Exhibit D at page 17). In addition he had purchased more since the listing of such shares. His brother, the 2nd defendant owned 1,500,000 million shares. Between the two of them they owned the controlling interests of the Fu Chip. By then the 1st defendant had already set himself about in manipulating the price of the Fu Chip shares by buying and selling. If the defendants refused to give the guarantee on the Fu Chip shares, then the Fu Chip shares might drop a few 10 in price only if the general condition of the market remained bullish. It would be possible for the 1st defendant to push the price up again with his manipulation. The Fu Chip, after all, is an investment Company. All its assets consist of landed property. So long as the properties in the Fu Chip have been quoted in their true value the success or failure in the taking over of the Shing On could not have affected the true value of the Fu Chip shares. Whatever set back in the market price of the Fu Chip shares could not have sent them below their true value. Even if it did, the defendants might have suffered a temporary paper loss of profit but would not have suffered a financial ruin. The 1st defendant did threaten that the Fu Chip would sue the plaintiffs on the main agreement. However, in the end he chose to avoid litigation and yielded to the plaintiffs' demand. The 1st defendant must have considered the matter thoroughly in the light of the then marketing condition and formed the opinion that the risk in giving the guarantee was more apparent than real. As I have said earlier on, neither party at the time could have foreseen the stock market subsequently slumping in such manner. Had the plaintiffs realised that the prices in general in the stock market would fall to the extent as we now know then they would not even bother to demand for the guarantee. They would be quite satisfied with the subsidiary agreement. Therefore I find as a fact that when the defendants agreed to sign the guarantee neither they nor the plaintiffs envisaged a drastic fall of the market and that the defendants never expected that on the guarantee they might be required to compensate the plaintiffs in terms of millions of dollars. This was an error of judgment in a business deal. The defendants were reluctant to be deprived of a good bargain - the subsidiary agreement. But I find that they were quito prepared to take a calculated risk (which at the time appeared to be very little) in order to pacify the plaintiffs who were adamant. It was in such circumstances that the guarantee was given.

38. Having come to the aforesaid conclusions on the facts of this case I shall deal now with some questions of law and other alternative issues before I return to the ultimate question - the binding effect of the guarantee. The first question is whether extrinsic evidence is admissible to show the circumstances under which the various documents were signed or for the interpretation of the guarantee. Here the plaintiff pleaded that they signed the subsidiary agreement without knowing its contents which never reflected the genuine intention of the parties. On the other hand the defendants plead that the guarantee was signed under duress or as the result of an unconscienable bargain. Both are relevant issues or questions relevant to the issue. It is only proper that parol evidence should be admissible to show the circumstances leading to the execution of both documents. Extrinsic evidence is admissible to prove any matter which by substantive law affects the validity of a document or entitles a party to any relief in respect thereof. See Phipson on evidence - p. 1789 and p.1802. Learned Counsel for the parties have not seriously challenged the admissibility of extrinsic evidence relating to the execution of these two documents. Mr. Zimmern for the defendants, however, contends that the extrinsic evidence is not admissible to contradict or vary the plain terms of the guarantee. The guarantee - Exhibit B, reads as follows:

"In consideration of your having at our request agreed to sell all your shares of and in the above mentioned Company whose registered office is situate at 274 Sha Tsui Road Ground Floor Tsuen Wan New Territories in the Colony of Hong Kong for the consideration of $10,500,000 by the allotment of 4,200,000 shares of $1.00 each of Fu Chip Investment Company Limited whose registered office is situate at No. 33 Wing Lok Street Victoria in the said Colony of Hong Kong and that the market value for the said ordinary shares of the said Fu Chip Investment Company Limited shall be deemed as $2.50 for each of the $1.00 shares under an Agreement for sale and purchase made between the parties thereto and dated the 27th day of February 1973, we Lau Yiu Long of No. 152 Tin Hau Temple Road, Flat Cl, Summit Court, 14th Floor in the Colony of Hong Kong Kowloon Merchant and Benjamin Lau Kam Ching of No. 31 Ming Yuen Street West, Basement in the said Colony of Hong Kong Merchant the director of the said Fu Chip Investment Company, Limited hereby agree and guarantee the market value for the said 4,200,000 ordinary shares of the said Fu Chip Investment Company shall be $2.50 per share and that the total value shall be of the sum of $6,300,000 for the period between 15th of April 1974 to the 30th of April 1974 and we further agree to indemnify and deep you indemnified against any damages, losses and other expenses which you may incur or sustain in the event of the market price according to The Far East Stock Exchange Ltd shall fall short of the $2.50 during the said period between 15th April 1974 and the 30th April 1974 that no time or indulgence granted for the said Fu Chip Investment Company Limited shall exonerate our liabilities hereunder."

39. It is submitted that the consideration referred therein was a past consideration. Any extrinsic evidence tending to prove a present or executory consideration would be in contradiction of a plain term of the guarantee and as such should be inadmissible. Mr. Gittins for the plaintiffs contends, however, that the form of the guarantee is exactly the same as those contained in the Encyclopaedia of Forms and Precedents (See Vol. 9 Encyclopaedia of Forms and Precedents p. 777-824) and that extrinsic evidence is always admissible to show the true consideration - in the present case, the plaintiffs completion of the main agreement with the Fu Chip.

40. The common law rule that no extrinsic evidence is admissible to contradict the plain terms of a written agreement has been subject matter of many judicial interpretations which indicate a fair number of exceptions. Thus in para. 650 of Chitty on Contracts it is said:

"Extrinsic evidence may therefore be admitted to show want of or failure of the consideration stated to have been given in a written instrument. Thus the words in a bill of exchange 'for value received' do not preclude the court from finding that no consideration has in fact been given. Extrinsic evidence is also admissible to prove the true consideration where no consideration has been stated or where the consideration is inaccurately recorded. Also an additional consideration may be proved, provided it does not contradict the stated consideration. 'The rule is that, where there is one consideration stated in a deed, you may prove any other consideration which existed, not in contradiction to the instrument; and it is not in contradiction to the instrument to prove a larger consideration than that which is stated."

41. In the case of Wood v. Wise⁽¹⁾ where a lease of rent restricted premises was expressed to be granted "in consideration of the sum of £850" in addition to the rent reserved in the lease extrinsic evidence was admitted to show that the sum of £850 expressed in the lease was in fact commuted rent intended by the landlord and tenant and not a premium or a condition of the grant. Evershed M.R. said at p.39 as follows:

"There was a good deal of discussion of the question whether it was permissible for the court to hear extrinsic evidence of the bargain made, or whether the court in this matter was confined to the deed. It is convenient for me to deal first with that point, and I conclude that extrinsic evidence was clearly admissible, though the result of so concluding is far from decisive of the case. I note that this is not an action on the deed; the question here is whether the plaintiff has a statutory right of action under section 2(5) of the Act of 1949. Moreover, if she has, then prima facie the defendant has done that which was illegal, and for which he is liable to criminal proceedings. As a matter of principle, therefore, evidence must be admissible to prove the true nature of the transaction; but, further, the evidence is required not to vary the deed, but with a view to explaining and proving what was in truth the consideration. For this purpose extrinsic evidence has always been admissible."

Romer L.J. said at p. 54:

"Morever, the extrinsic evidence is not sought to be introduced in the present case with a view to contradicting anything that is expressed in the lease, but in order to show what was the true nature of the £850, which, it is to be observed, is nowhere described in the lease as a 'premium'."

42. In Goldshede v. Swan⁽²⁾ the consideration expressed in a quarantee for a loan was:

"In consideration of your having this day advanced to our client, Mr. Vernon Dolphin of Piccadilly, in the county of Middlesex, the sum of £750, secured by his warrant of attorney, payable on the 22nd day of August next, we hereby jointly and severally undertake to pay the same on the said 22nd day of August, or so soon afterwards as you apply for same, in case default should be made in payment of the sum of £750."

It was held that extrinsic evidence was admissible to show that the consideration expressed in the document of guarantee was in fact an executory consideration. At p.159 Pollock, C.B. said:

"Where any written instrument is ambiguous, evidence is receivable to construe its meaning, but not to alter or vary in any manner the terms of that instrument. Here it was proved, that the guarantee was given, and that the money was thereupon advanced. In the case of Butcher v. Stewart, the memorandum was held to be prospective, and judgment was given for the plaintiff. That case is very similar to the present. It was a special case, and eas very recently decided. The present case also falls within the same principle as that of Haigh v. Brooks. The expression 'this day' may mean something which has been done, or which is to be done this day. Evidence may therefore be properly admitted to explain its meani, g though not to contradict it. The words are not to have that grammatical strictness of construction put upon them for which the defendant's counsel contends; but such a one as will explain the meaning of the parties."

43. The principle of extrinsic evidence being admissible to prove additional consideration to the consideration expressed in a power of attorney was approved in Frith v. Frith⁽³⁾ where Lord Atkinson citing the case of Clifford v. Turrell said:

"The Vice-Chancellor (Sir L. Shadwell) in delivering judgment in the case, lays down, in the opinion of their Lordships correctly, the rule of law upon this subject. He said:

And then added:

Their Lordships think the present case cones within that rule, that the evidence proposed to be given did not contradict the deed, and that the appellant's first contention is well founded."

44. In Turner v. Forwood And Another⁽⁴⁾ Lord Goddard, C.J. went further to say at p.747:

"Clifford v. Turrell appears to lay down in the clearest possible terms that, at any rate, where there is a nominal consideration - evidence is always admissible to show that the true consideration was something more than the consideration stated in the written agreement, be it under hand or under seal."

45. The principle obtained from these authorities shows that extrinsic evidence is admissible to explain a consideration which has been inaccurately described in an instrument as past consideration or smaller consideration. In the present case the extrinsic evidence purports to explain that the consideration which was described in the guarantee as "having agreed to sell" in accordance with the terms of the main agreement of the 27th February 1973 was in fact an executory consideration of "agreeing to sell" or "agreeing to complete the sale" on the 4th May 1973. Following the same reasoning which fell from the learned Chief Baron, I am of the opinion that extrinsic evidence in the present case is admissible to explain the terms in the guarantee. Such evidence is not contradictory. On the contrary it purports to show the true nature of the consideration. Indeed it is the Defence case that the plaintiffs demanded the guarantee as a condition for their willingness to complete the sale in the main agreement. I am of the opinion that parol evidence or extrinsic evidence is properly admissible in the present case for the interpretation of the consideration expressed in the guarantee.

46. There is a subsidiary and related contention to this. It is suggested that an agreement to do something which the plaintiffs were under a legal duty to do to a third party could not constitute a valuable consideration. The plaintiffs were under a duty to the Fu Chip to complete the sale of the Shing On shares to the Fu Chip under the main agreement. Thus their agreement with the defendants to do the same was in fact no consideration at all.

47. In my opinion this problem is more juristic as a mental exercise than judicial. In the words of the learned authors of Cheshire and Fifoot in the Law of Contract (8th eddition) "the paucity of modern litigation on the question suggests that it is not a pressing problem". Having considered the relevant authorities the principle obtained, as I understand it, is that the performance of or a promise to perform a duty to a third party is valuable consideration for endorcing a promise by the promisor provided that such performance of or undertaking to perform the said duty is to the detriment of the promisee or to the benefit of the promisor. See Cheshire and Fifoot on Law of Contract 8th edition p. 92-95, Chitty on Contracts Vol. 1 23rd edition para. 130-132; also Shadwell v. Shadwell⁽⁵⁾; Scotsen v. Pegg⁽⁶⁾; Turner v. Owen⁽⁷⁾ and Chichester v. Cobb⁽⁸⁾. This principle was the ratio in Scotsen v. Pegg which received the approval of the majority decision of the Privy Council in New Zealand was Shipping v. Satterthwaite⁽⁹⁾ where Lord Wilberforce at page.1020 said:

"In their Lordships' opinion, consideration may quite well be provided by the stevedore, as suggested, even though (or if) it was already under an obligation to discharge to the carrier. (There is no direct evidence of the existence or nature of this obligation, but their Lordships are prepared to assume it.) An agreement to do an act which the promisor is under an existing obligation to a third party to do, may quite well amount to valid consideration and does so in the present case: the promisee obtains the benefit of the direct obligation which he can enforce. This proposition is illustrated and supported by Scotsen v. Pegg which their Lordships consider to be good law."

48. In the present case the promise or act of selling the Shing On share to the Fu Chip by the plaintiffs could be valuable consideration for the guarantee signed by the defendants.

49. Such act or promise might not be to the detriment of the plaintiffs. But it was for the benefit of the defendants. In the words of the 1st defendant he was anxious that the plaintiffs should complete the transaction in the main agreement. Their refusal to complete would affect the share price of the Fu Chip of which he was the majority shareholder. It is the defendants' case that the guarantee was signed solely on the plaintiffs' demand for the guarantee before the plaintiff would perform the main agreement. Although the defendants were unwilling they eventually signed the guarantee so that the plaintiffs would complete the transaction.

50. It is contended by the plaintiffs that the guarantee was signed in consideration of the cancellation of the subsidiary agreement. Such cancellation would, of course, be sufficient consideration if it was the true intention of the parties. I have found as a fact that that was not so.

51. The guarantee never referred to the cancellation of the subsidiary agreement as a consideration. The plaintiffs' evidence is such that at all material times they never suggested the cancellation of the subsidiary agreement as a quid pro quo for the guarantee. On the contrary, the plaintiffs' evidence is that the terms of the subsidiary agreement never represented their true intention and should be cancelled in any event and should be replaced by a guarantee which would give effect to their true intention. The evidence of the 2nd plaintiff and that of Chan Kwai Wah suggest that the plaintiffs would refuse to complete the transaction under the main agreement with the Fu Chip unless the defendants give them a guarantee as to the price of the Fu Chip shares allotted to them. In his evidence in chief Chan Kwai Wah said "I did mention to Lau that Pao did not want an agreement of sale in advance and would only accept a form originally agreed to viz: a straight guarantee that the value would be the same for one year".

52. Indeed such intention was manifested in the letter of Hastings, acting for the Shing On, to Yung, Yu, Yuen & Company - Exhibit A-21. At that time, predominent in the mind of the plaintiffs was that the subsidiary agreement should be cancelled in any event but they would not complete the transaction with the Fu Chip unless the defendants gave them the guarantee. I have found as a fact that there was no oral agreement as alleged by the plaintiffs and that the subsidiary agreement was not signed by mistake. There is no basis for this claim.

53. In view of the foregoing I also find that even if the guarantee is invalid such finding will not bring the subsidiary agreement back into force. The general rule is that a recision is implied where the parties have effected such an alteration of the terms as to substitute a new contract in place of the old. If a recision is effected the contract is extinguished and it cannot afterwards be set up again by one of the parties against the other. The decisions in Egremont v. Courtenay⁽¹⁰⁾ and in Firth v. Midland Railway Co.⁽¹¹⁾ are not true contradictions to this principle.

54. In the Egremont case the surrender of the old lease depended on the validity of the new lease. Once the new lease was held invalid it is not surprising that the surrender was equally inoperative. This is eviden in the judgment of Coleridge, J. who said at p. 686:

"There were the counterparts of three leases produced, of the respective dates of 1755, 1785 and 1812; and the plaintiff's case was that the two latter were invalid, which was admitted, and that the last was granted in consideration of the surrender of the first, and operated as a surrender of it. This was necessary to his case, as one of the lives on which the lease of 1755 was granted was still in being, and that lease still in force unless so surrendered. But the defendant contended that the surrender having been made wholly in consideration of the grant of a new and valid lease, did not take effect because the new lease was invalid."

and again at page 688:

"We have had occasion to consider this doctrine in another case of the same sort, and to examine the decisions at some length, and we need not now repeat that examination, contenting ourselves with saying the principal to be found laid down by Lord Mansfield in Wilson v. Sewell (1766) 1 Wm. B1. 617 4 Burr at p. 1980 and Davision d. Bromley v. Stanley (1768) 4 Burr. at p. 2213 seems to us the true one; that when a new lease does not pass an interest according to the contract, the acceptance of it will not operate as a surrender of the former lease; that, in the case of a surrender implied by law from the acceptance of a new lease, the condition ought also to be understood as implied by law, making void the surrender in case the new lease should be made void; and that in case the express surrender is so expressed as to show the intention of the parties to make the surrender only in consideration of the grant, the sound construction of such an instrument, in order to effectuate the intention of the parties, would make the surrender also conditional, to be void in case the grant should be void."

55. In Firth's case the new agreement merely provided a substituted mode of performance of precisely what was required to be done in the old agreement. When the substituted mode of performance could not be carried out specific performance was ordered in accordance with the old agreement.

56. In the Egremont case the consideration for the surrender of the old lease was the grant of a new lease. In the Firth case the substance of the new agreement was a variation of the mode of the performance of what was to be done under the old agreement. It was in such circumstances that the terms of the old agreement were received when those of the new agreement became void or voidable. In the present case the plaintiff pleaded that the subsidiary agreement (the old agreement) was void because the parties were not ad idem and that it was voidable on the ground of non est factum. The guarantee, (the new agreement) made no reference to the old agreement as consideration for the new agreement. It is the plaintiffs' case that the subsidiary agreement was rescinded on such grounds. The basis for the guarantee, according to the plaintiffs' pleadings, is that it gave effect to the true intention of the parties who had a verbal agreement in mid February 1973. To hold that the invalidity of the guarantee alone could case a resurrection of the subsidiary agreement would be wrong in law and amounting to allowing the plaintiffs to approbate and reprobate in saying that the subsidiary agreement was invalid and valid in the same breath.

57. It is alleged that the defendants' conduct in signing and giving the guarantee constitute a representation that the guarantee is valid and effective so as to induce the plaintiffs to complete the transaction with the Fu Chip. Relying on such representation the plaintiffs acted to their detriment by agreeing to cancel the subsidiary agreement. The short answer to this contention is that it was the plaintiffs who demanded the guarantee because the subsidiary agreement never represented their true intention. The demand by the plaintiffs was not induced by the defendants' representation. I have found that the plaintiffs would demand for the cancellation of the subsidiary agreement in any event. In my opinion this plea revolves round the question whether the guarantee was forced upon the defendants by threat or as a result of an unconscienable bargain. If the guarantee was signed without any threat then the plaintiffs can sue upon the guarantee. Otherwise the plaintiffs cannot rely on estoppel to change the nature of a voidable document (i.e. the subsidiary agreement). Estoppel is an equitable remedy which is not available to any party who comes to Court with tainted hands.

58. Lastly I will consider the ultimate question - the binding effect of the guarantee on the defendants. I have found that the plaintiffs, well knowing the detrimental effect on the prince of Fu Chip shares and on the defendants' financial position if they refused to honour the main agreement with the Fu Chip, threatened to repudiate the main agreement unless the defendants signed the guarantee. Learned Counsel contends that the guarantee was signed under a threat or as a result of an unconscienable bargain. It falls upon me to find whether in law and in fact such a threat renders the guarantee unenforceable. A number of cases have been cited as relevant to this question of law.

59. In D. & C. Builders Ltd. v. Rees⁽¹²⁾ it was held that financial intimidation would vitiate a true accord to accept a lesser sum than the amount of the debt so that the creditor was not barred from suing for the balance by accepting the lesser sum. In that case the creditors were, to the knowledge of the debtor, in desperate finanoial straits. The debtor then indicated to them that he (the debtor) would pay a lesser sum in satisfaction or nothing. In the words of Danckwerts L.J. at p. 626:

"The Rees really behaved very badly. They knew of the plaintiffs' financial difficulties and used their awkward situation to intimidate them. The plaintiffs did not wish to accept the sum of £300 in discharge of the debt of £482, but were desperate to get some money."

60. The case of Rookes v. Barnard⁽¹³⁾ is the authority for the proposition that the tort of intimidation comprehends not only threats of criminal or tortious acts but also threats of breaches of contract.

61. In Barton v. Armstrong and others⁽¹⁴⁾ it was held that where the plaintiff proved that threats were used (in that case, threats of murder) and the threats were a reason for the plaintiff executing a deed the plaintiff was entitled to relief to have the deed set aside even though he might well have entered into the contract if no threats had been uttered to induce him to do so and that it was for the defendant to prove that the threats and unlawful pressure did not in fact contribute to the plaintiffs' decision to sign the deed.

62. The case of Lloyds Bank v. Bundy⁽¹⁵⁾ appeared to have been decided on special circumstances. It was decided on the basis of a breach of fiderciary care on the part of the Bank towards its client, an old man, who executed a guarantee and a charge on his property in order to assist his son from financial ruin. The Court of Appeal held on evidence that the Bank failed to ensure that the client had independent and informed advice whether there was any prospect of the son's Company's affairs becoming viable and that there was inequality of bargaining power. Having enunciated the general rule of the law that no bargain would be upset which was the result of the ordinary interplay of forces Lord Denning M.R. said at p. 763:

"Yet there are exceptions to this general rule. There are cases in our books in which the courts will set aside a contract, or a transfer of property, when the parties have not met on equal terms, when the one is so strong in bargaining power and the other so weak that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall. Hitherto those exceptional cases have been treated each as a separate category in itself. But I think the time has come when we should seek to find a principle to unite them. I put on one side contracts or transactions which are voidable for fraud or misrepresentation or mistake. All those are governed by settled principles. I go only to those where there has been inequality of bargaining power, such as to merit the intervention of the court."

63. He went on to give a number of examples in cases where the court would grant relief and said in conclusion at p. 765:

"Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on 'inequality of bargaining power'. By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the word 'undue' I do not mean to suggest that the principle depends on proof of any wrongdoing. The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. I have also avoided any reference to the will of the one being 'dominated' or 'overcome' by the other. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal. With these explanations, I hope this principle will be found to reconcile the cases."

64. On this point Sir Eric Sachs said at p. 771:

"As regards the wider areas covered in masterly survey in the judgment of Lord Denning M.R., but not raised arguendo, I do not venture to express an opinion - though having some sympathy with the views that the courts should be able to give relief to a party who has been subject to undue pressure as defined in the concluding passage of his judgment on that point."

65. This principle was further explained by Lord Denning M.R. in Clifford Davis Management Ltd. v. W.E.A. Records Ltd.⁽¹⁶⁾ where he said at p. 64:

He went on to give all the instances of the unconscienable bargain and said:

"For these reasons it may well be said that there was such inequality of bargaining power that the agreement should not be enforced and that the assignment of copy-right was invalid and should be set aside."

66. In view of the foregoing the principle is that the Court will not upset a contract if it is simply the result of the ordinary interplay of forces. However the Court will not enforce a contract which is forced upon a party who stands in such unequal bargaining power that he is driven to the wall and derives virtually no benefit from the contract or, at best, in obviously unconscienable bargain. To this principle the facts in the Bundy case, the Clifford Davis case and the D. & C. Builders case are classic examples. In this connection the Court will look into the bargaining power of the parties bearing in mind that a threat of breach of contract may well be a form of intimidation so as to place one party in an advantageous position and that once it is proved that the threat is a reason for the other party to enter into the contract it is up to the threatening party to prove that the threat did not in fact contribute to the other party entering into the contract.

67. In the present case I find as a fact that the defendants signed the guarantee in error of judgment by yielding to the plaintiffs' demand. The 1st defendant said that if the plaintiffs repudiated the main agreement the drop in price of the Fu Chip shares could exceed 20 cents. That was not more than 5 per cent of the highest value paid for the Fu Chip shares in March 1973. That would not cause the financial ruin of the defendants. When cross-examined on this point, the allegation of threat, the 1st defendant's evidence was as follows:

68. I am sure that prior to the 4th May 1973 the defendants particularly the 1st defendant, regarded the plaintiffs' refusal to complete as unreasonable rather than that of a threat. Otherwise they would have raised the point much earlier.

69. Further, the defendants owned the controlling interests of the Fu Chip. They could have stood firm and caused the Fu Chip to sue the plaintiffs for breach of the main agreement.

70. In the business world it is a frequent occurrence that the contracting parties are not equal in bargaining power. So long as the law of supply and demand obtains in matters of economics it does not require great imagination to accept such a phenomenon. So long as one party does not make such unconscienable demand as to give virtually nothing in return or that the other party is not driven to desperation for the bargain one has to accept that the contract is simply the result of ordinary interplay of forces.

71. Having regard to the circumstances of the present case I am of the opinion that the defendants merely yielded to a temptation of taking the easy way out to solve a problem by accepting a risk far greater than their expectation. The defendants' position was much stronger than that of the farmer in the Bundy case and the builder in the D. & C. Builder case. In the circumstances of this case I find that the case does not merit the intervention of the Court for the guarantee to be declared unenforceable. In short the defendants are bound by the guarantee. There will be judgment for the plaintiff in the sum of $5,392,800.00 with costs.

Representation:

(1) (1955) 2 Q.B. 29.

(2) (1847-8) 1 Ex. p.154.

(3) (1906) A.C. 254

(4) 1 A.E.R. 746.

(5) (1860) 9 C.B. (NS) 159

(6) (1861) 6 H and N295

(7) (1862) 3 F and F 176

(8) (1866) 4 LT 433

(9) (1974) 1 A,E,R, 1015

(10) (1843) A.E.R. 685

(11) (1875) 20 Eq. 100

(12) (1966) 2 Q.B. 617.

(13) (1964) A.C. 1129

(14) (1975) 2 W.L.B. 1050

(15) (1974) 3 A.E.R. 757

(16) (1975) 1 W.L.R. 61.