Fai Kee Piece Goods (A Firm) v. Sam Wah Hing Garment Factory Ltd and Another
Read the full judgment text of HCA 112/1981 on BabelCite. This High Court CFI judgment was delivered on 10 January 1983.
1. At the conclusion of the hearing of this case, I informed the parties that I would be entering Judgment for the plaintiff as claimed and that I would in due course be giving my reasons for this. This I now do.
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HCA000112/1981
Economic duress or undue influence - extent to which this doctrine applies to the Endorser of a cheque - whether refusal to perform terms of a contract can amount to economic duress - the necessity of privity of contract in such a situation. General principals of economic duress considered. Economic duress not established on the facts of this case.
IN THE SUPREME COURT OF HONG KONG HIGH COURT ______ BETWEEN
______ Coram: The Hon. Mr. Justice Mayo. Date: 10 January 1983 __________ JUDGMENT __________ 1. At the conclusion of the hearing of this case, I informed the parties that I would be entering Judgment for the plaintiff as claimed and that I would in due course be giving my reasons for this. This I now do. 2. The plaintiffs are suing the 1st defendant as the drawer of a cheque and the 2nd defendant as the endorsor of a cheque in their favour dated the 6th of December 1981 in the sum of $82,152.95. The cheque was a post-dated cheque of one month and represented the purchase price of textile fabric which was supplied by the plaintiffs to the 1st defendant pursuant to two contracts dated the 10th of August 1981. At the time of the relevant transactions the 2nd defendant was the managing director of the 1st defendant. In February this year an application was made to the court for the 1st defendant to be wound up. 3. The 2nd defendant's defence to this claim is that he only agreed to endorse the said cheque as a result of the duress exercised upon him by the plaintiff as a result of the plaintiff's undue influence. I therefore considered it to be appropriate that the 2nd defendant should first present his case as the main burden of proof in practical terms lay upon him. 4. Mr. Sze Hung gave evidence himself but did not call any other witnesses. He said that the 1st defendant had entered into two earlier contracts with the plaintiffs for the supply of a similar type of nylon taffeta cloth under two other contracts. It had been a term of all of the contracts which had been entered into that payment for the goods supplied would be by way of post-dated cheques which were post-dated 30 days from the delivery of the goods. When the goods under the first two contracts had been delivered the 1st defendant had given to the plaintiffs such a post-dated cheque. It had then become apparent to Mr. Sze that the 1st defendant was experiencing some financial difficulties and this being the case he had communicated with the plaintiffs and requested them not to present the cheque for payment on the due date but to allow them an extension of time of 14 days to obtain sufficient funds to enable the cheque to be honoured. The plaintiff acceded to this request. However on the due date when the cheque had been presented for payment it had been dishonoured. There had then been a further conversation with the plaintiffs and he had requested them to re-present the cheque for payment on the following day and it had then been honoured. All of this had happened towards the end of October which was the time when the plaintiffs were under the terms of the second two contracts required to deliver the fabric to the 1st defendant. He had on at least 6 occasions spoken to representatives in the plaintiff's firm requesting them to expedite the delivery of the fabric. His reason for doing this was that he had to meet deadlines under the contracts he had entered into with another company to ship children's baseball jackets to the United States of America. He agreed that when he had spoken with the plaintiffs on this subject towards the end of October they had demanded that the 1st defendant should effect payment for the fabric by cash. He had not agreed with this requirement as the contracts contained a provision for payment to be effected by the post-dated cheques I have referred to. He had then had a discussion with a Mr. David Chan who was a friend of his and who was also friendly with the plaintiffs and he had been under the impression that Mr. Chan had been able to resolve the differences which had arisen in this connection. He also agreed that Mr. Chan had passed on to him a suggestion from the plaintiffs to the effect that in lieu of payment in cash it would be acceptable if Mr. Sze himself endorsed the 1st defendant's cheque so as to incur personal liability. He said that he had not agreed to this suggestion as there was no stipulation in the contracts requiring this. It had been his impression that the problems which had arisen had been resolved. 5. At about 5 o'clock in the afternoon of the 5th of November 4 fokies from the plaintiffs had attended upon him with the material. He had then with these men inspected the goods and there had been slight modifications required to the description of the goods in the invoices which had been brought by the man. However at about 6 p.m. one of the men had asked him for a cheque in payment of goods. He had then drawn the cheque for and on behalf of the 1st defendant and tendered it to the man. The man had then informed him that it would be necessary for him also to endorse the cheque in his personal capacity. He had refused to do this. After some discussion the man had then telephoned his principal, Mr. Ng and obtained further instructions from him. He understood from the man that Mr. Ng was adhering to the requirement that the cheque be endorsed. He had then himself spoken on telephone to Mr. Ng who insisted that if he did not agree to endorse the cheque as requested the fokies would take back the material. This had placed him in a serious dilemma. By this time he was urgently in need of the material if there was to be any prospect of his being able to fulfil his contractual obligations for the baseball jackets. He had pointed out to Mr. Ng the fact that there was no requirement in the contracts for the cheques to be endorsed in the manner proposed by the plaintiffs but Mr. Ng had simply hung up the telephone on him. It was at this stage that he realised that he had no alternative but to comply with the requests which were being made for him to make the required endorsement. He had accordingly done so. 6. Mr. Ng Man Kam who is a partner in the plaintiffs firm gave evidence. His evidence concerning the first two contracts and the dishonoured cheque was essentially similar to that given by Mr. Sze. As a result of the cheque being dishonoured he no longer trusted the 1st defendant. He had then put forward his requirement that he would only agree to deliver the goods under the later contracts against payment in cash. Shortly after this he had had a conversation with Mr. David Chan who had been the person who had originally introduced him to the 1st defendant. There had then been a discussion and he had agreed that in lieu of cash he would be prepared to accept a post-dated cheque if it was endorsed by one of the partners of the defendant company. I take this evidence to mean a person in a responsible position as the defendant company is a limited liability company. He assumed that this agreement would be communicated to the 1st defendant. On the morning of the 5th of November he had received a telephone call from Mr. David Chan. Mr. Chan informed him that the 1st defendant would now agree to the cheque being endorsed in the manner proposed. As a result of this he gave the necessary instructions to his staff to deliver the material to the 1st defendant. However he gave further instruction to Mr. Lee one of his delivery men to ensure that when the cheque was presented to him in payment of the goods it must be endorsed by the person drawing the cheque. If any difficulties were encountered in this connection he should telephone back to him, that is Mr. Ng. In the evening he remembered receiving a telephone call from Mr. Lee informing him that the person who signed the cheque was refusing to endorse it as was required. Mr. Sze had then been put on to the telephone line and he had a short conversation with him. He had told Mr. Sze that he had given instructions to his men to take back the 7 material if he did not endorse the cheque. He had then hung up the telephone. He then telephoned Mr. David Chan and informed him of the position. Later in the evening his staff returned to his office with the cheque which had been endorsed by Mr. Sze. He had presented the cheque for payment on its due date and it had been dishonoured. At no time did either the 1st defendant or the 2nd defendant make any complaint or make any allegations of duress until the defence to his claim was filed in March 1982. 7. Mr. Ng did however concede that in the discussions and negotiations that he had had with Mr. Sze he had been in a much stronger position than Mr. Sze. He had been aware of the fact that the 1st defendant needed the material urgently to meet its contractual commitments and that it would have encountered difficulty in obtaining supplies of similar material from alternative sources in the time which would have been available. He also agreed that if the 1st defendant and Mr. Sze had refused to comply with his requirements he would have been able to sell the material to other parties albeit at a loss of between 20 and 30%. He frankly stated that it was his intention to keep the material in the warehouse until the 1st defendant and Mr. Sze complied with his requirements. I consider it to be necessary to scrutinize Mr. Ng's position quite closely. It seems important to me to establish whether Mr. Ng was acting defensively or aggressively. Mr. Ng also gave evidence that he was so concerned about the financial status of the 1st defendant that he would have preferred to take a certain loss of between 20 and 30% on the goods rather than risking the whole amount by agreeing to deliver the goods to the 1st defendant and obtain its cheque without any form of security. I believe his evidence in this connection. It is also useful to have regard to other background material. It is particularly significant to note that the demand which Mr. Ng made for cash was essentially a defensive measure designed to protect his interest. While conscious of the fact that he was in a strong negotiating position, he was nonetheless prepared to discuss and negotiate a retreat from his initial stand rather than using his superior position to extract more favourable terms to himself. At no time did he attempt to increase the price or impose other oppressive conditions. I believe that Mr. Ng's motives were honest and genuine and that all that he was seeking to do was to protect his own interests. 8. Mr. David Chan also gave evidence for the plaintiffs. He had assumed a role as a middle man and a mediator between Mr. Ng and Mr. Sze. Mr. Sze had made the initial approach to him requesting him to intercede with Mr. Ng in an endeavour to secure the delivery of the material.. Mr. Chan's evidence was very similar to that of Mr. Ng. He was adamant that Mr. Sze had agreed to endorse the cheque prior to the goods being delivered to him on the 5th of November and he also confirmed that on what must clearly have been the evening of the 5th of November he had received a telephone call from Mr. Ng informing him that Mr. Sze had resiled from his agreement to endorse the cheque. It had been in those circumstances that he had then spoken on the telephone to Mr. Sze and had called upon him to honour the agreement he had entered into to this end. He had subsequently learned from Mr. Ng that Mr. Sze had done so. I am satisfied that Mr. Chan was a truly independent witness and I have no hesitation in accepting his evidence. 9. The plaintiffs did not call any other witnesses. There is not a great deal of difference between the plaintiffs version of the events and the 2nd defendant's. The main difference relates to Mr. Sze's evidence concerning the time when he knew that he would have to endorse the cheque. He accepted in his evidence that there had been previous discussions on the subject. However he claimed that the difficulty had been resolved and Mr. Chan had undertaken to "fix the matter up". On the other hand both Mr. Ng and Mr. Chan claimed that there had not been any resolution of the problem and that indeed it was upon obtaining Mr. Sze's concurrence to making the endorsement that delivery of the goods had been effected on the 5th of November. This evidence is of some importance as it also tends to tie in and substantiate Mr. Ng's evidence to the effect that the delivery of the material under the later contracts was definitely connected to the performance of the earlier contracts and his decision to withhold delivery of the goods unless there could be some reasonable assurance that the plaintiffs would in fact be paid for the goods they were delivering. Where there are discrepancies between the evidence of Mr. Ng on the one part and Mr. Sze of the other part I have no hesitation in accepting Mr. Ng's testimony. He was a far more convincing and satisfactory witness than Mr. Sze was. In addition to this all of the background events tend to support Mr. Ng's version of the evidence. I do not think that it is at all likely that Mr. Chan would have been able by his intervention to persuade Mr. Ng to simply drop his demands for cash and then to agree to accept a post-dated cheque from the 1st defendant without any endorsement by Mr. Sze. Mr. Sze's evidence in this connection was that he pointed out to Mr. Chan that there was no provision in the original contracts for the cheques being endorsed and accordingly it was unreasonable to require any such endorsement. The reality of the situation was that the post-dated cheque which had been drawn by the 1st defendant had been dishonoured on the 26th of October after the 2nd defendant had requested an extension of time of 2 weeks. The cheque had been dishonoured notwithstanding the fact that all parties to the transaction knew that the plaintiffs should under the contracts deliver further supplies of material which were needed urgently. This must have been a strong indication to the plaintiff that the defendants were. in an insecure financial position. This would justify the plaintiffs in coming to the conclusion that the 1st defendant could not be trusted and that it was essential to obtain some form of security in respect of the cheque at the very least. There seems to me to be very little doubt that what in fact happened was that a genuine attempt was made by all parties namely, Mr. Ng, Mr. Chan and Mr. Sze to reach some form of compromise which would be acceptable to all parties. I find as a fact that Mr. Sze voluntarily agreed to endorse the cheque and that it was on the basis of this agreement that Mr. Ng made the arrangement to deliver the goods to the 1st defendant on the 5th of November. In coming to this conclusion I have also borne in mind the other factors which would have been prevailing at that time. Mr. Sze gave evidence that when he endorsed the cheque on the 5th of November he had been in control of the financial affairs of the 1st defendant and had been satisfied that no problems were likely to arise which would lead to a situation whereby the 1st defendant's cheque would not be honoured on its presentation on its due date. In addition to this Mr. Sze gave evidence that when the baseball jackets were completed the 1st defendant would receive payment particularly having regard to the fact that the agent who would be inspecting the goods on behalf of the American customers, Ace Merchandising Corporation, was a friend of his. All of this would indicate that the risk which was being assumed by Mr. Sze in endorsing the cheque was not a grave risk. It is therefore likely that he would not have been unduly reluctant to assume it having regard to the benefits which would accrue to the 1st defendant in obtaining immediate delivery of the material required to make up the baseball jackets. 10. Mr. Barretto who was representing the plaintiffs submitted that there was a further reason why economic duress could not be maintained by the 2nd defendant. The 2nd defendant was not a party to the agreement between the plaintiffs and the 1st defendant. Accordingly it would be the 1st defendant who would suffer any ill consequences as a result of any alleged duress and not him. I can see some force in this argument. I accept that it is necessary to treat the 2nd defendant as a separate legal entity. On this basis it should have been open to the 2nd defendant to enter into discussions or negotiations with the 1st defendant so as to ensure that if he did endorse the cheque he could himself obtain some satisfactory form of protection from the 1st defendant, its other directors or shareholders. 11. Mr. Ismail who was acting for the 2nd defendant submitted that even on Mr. Ng's evidence it was clear that a case had been made out by the 2nd defendant that he had only endorsed the cheque as a result of being subjected to economic duress. Certainly such a case could be made out if Mr. Sze's evidence was accepted. He referred to the leading authority on economic duress, a Privy Council case Pao On and Others v. Lau Yiu Long and Other (1) at page 450 their Lordships briefly outline the requirements for economic duress:
As this is a comparatively recent doctrine Mr. Ismail also sought assistance from other cases including Australian cases. He referred to the case of T. A. Sundell & Sons Pty. Ltd. v. Emm Yannoulatos (Overseas) pty. Ltd. (2) in support of the proposition that where a party to a contract threatened not to perform his obligations thereunder such a threat could amount to economic duress. Another Australian case, Mason v. The State of New South Wales (3) established that the bona fides of the parties was not necessarily a conclusive factor and that it was not necessary to show that the defendant had acted in bad faith. Mr. Ismail argued from this that the most important factor which had to be weighed was Mr. Sze's state of mind. It was a subjective test. Mr. Ng on his own evidence had said that he was not prepared to fulfil this contractual obligations unless Mr. Sze endorsed the cheque as required. Mr. Ng had also admitted that he knew he had a strong negotiating position and indeed had said that the plaintiffs were quite prepared to keep the material in their warehouse until Mr. Sze complied with his request. It was only as a result of this coercion that Mr. Sze had submitted and endorsed the cheque. 12. Mr. Ismail also referred to paragraph 4 of the reply and defence to counterclaim which reads:
He criticised this paragraph on the grounds that there could be no contract between the plaintiff and the 2nd defendant as there was an absence of consideration. This meant that the 2nd defendant was simply embarking upon a gratuitous undertaking. This may well be true. I do not however see that this assists the 2nd defendant in any way. The 2nd. defendant did not plead absence of consideration in his defence and I do not consider this issue to be a relevant consideration. 13. The main issue I have to determine is not whether there has been a breach of contract. What I have to decide is whether the 2nd defendant is able to make out a case that he only endorsed the cheque as a result of economic duress or that he had been subjected to undue influence on the part of the plaintiff. I find that the guidelines load down by the Privy Council in Pao On(1) are of considerable assistance in determining this. I am satisfied that it is necessary for me to have regard to all of the surrounding circumstances. While the plaintiffs' motives may not be a conclusive factor I am bound to take them into account in determining whether undue influence has been exercised or any form of duress. I am satisfied that the plaintiff was simply endeavouring to protect himself against losses which he might suffer if the 1st defendant's cheque was dishonoured like the earlier cheque he received from them. He had very real grounds for his fears and I believe he put forward sensible proposals to Mr. Sze to overcome these fears. I also believe that he genuinely wished to fulfil his contractual obligations to the 1st defendant and that he did not seek to take unfair advantage of the position he found himself in. It is also important to consider the position of Mr. Sze. I accept that he was anxious that the material should be delivered to the 1st defendant. However he would have been well aware of the problems which had arisen in connection with the payment of the previous material supplied. I also find as a fact that he knew before the material was delivered under the subsequent contracts that he would be required to endorse the 1st defendant's cheque and that he had agreed to this in advance. He would have had ample opportunity of seeking and obtaining legal advice. He did not see fit to do so. I accept that prior to his agreeing to endorse the cheques that he did make protestations to Mr. Ng. I do not think though from Mr. Sze's evidence that it is likely that his protestations would have been based upon the requirement being unduly burdensome but that he would have attempted to argue that there was no provision contained in the contracts for the post-dated cheque being endorsed. It is however significant that Mr. Sze did not make any protestation or objections after the goods had been delivered. This would indicate to me his acceptance of the position. However the most important factor that I have borne in mind is that I am satisfied that Mr. Sze did voluntarily agree to make the endorsement on the cheque and this agreement was all part of a perfectly reasonable compromise which was effected by the parties concerned. For the reasons I have indicated I advised the parties that I would be entering judgment as claimed in favour of the plaintiff and I would dismiss the counterclaim. The plaintiff will be entitled to its costs and interest at the rate of 17? from the 6th of December 1981 to the present date and interest at the rate of 13% will be payable from today until due payment has been made of the judgment debt.
(1)(1979) 3 W. L. R. (2) (1956) 56 S. R. N. S. W. 323. (3) (1959) 102 C. L. R. 108 Representation: Mr. Barretto (Edmund Cheung & Co.) for Plaintiff. A. Ismail (D. W. Ling & Co.) for 2nd Defendant. |