Tam Lup Wai Franky v. Vong Shi Ming Nicolas
Read the full judgment text of HCA 358/2001 on BabelCite. This High Court CFI judgment.
1. In this action, the plaintiff is suing the defendant on an agreement in writing, dated 29 December 2000 ("the Agreement") (B2:392-394) signed by both parties by which the defendant agreed to pay the plaintiff the sum of $1,527,690 by instalments in the following manner :
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HCA000358A/2001 HCA358/2001 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO.358 OF 2001 -----------------------
----------------------- Coram: Deputy High Court Judge Carlson in Court Dates of Hearing: 9, 10, 11, 12, 15 & 16 July 2002 Date of Judgment (Handed Down): 23 August 2002 ------------------------ J U D G M E N T ------------------------ INTRODUCTION 1.In this action, the plaintiff is suing the defendant on an agreement in writing, dated 29 December 2000 ("the Agreement") (B2:392-394) signed by both parties by which the defendant agreed to pay the plaintiff the sum of $1,527,690 by instalments in the following manner :
I will need to refer to the Agreement more fully in due course. It is sufficient for present purposes to also note that the Agreement provided for the transfer between the parties of some shareholdings in and the assignment of debts due from companies that formed part of the corporate arrangements by which the parties had decided to make their investments together. 2.The plaintiff is asking for a declaration that this Agreement is valid and enforceable and for its specific performance; alternatively, for damages to be assessed, presumably in the amount that he would have received had he been paid under the Agreement by the defendant. 3.The defendant says that he signed the Agreement under duress and that, accordingly, it is voidable at his suit and that it should be set aside. Alternatively, that it is unenforceable for want of consideration. That, in a few words, is the essence of the dispute. 4.This case concerns one of the many failed internet ventures of the late 1990s. It is helpful to start by explaining how this came about, and to say something about the plaintiff and the defendant, and some of the other personalities involved, for they too, whilst only supporting players have their parts in this. THE PARTIES 5.The plaintiff and the defendant got to know each other in about 1996 and became tennis partners and friends through their membership of the Pacific Club in Kowloon. Both are accomplished individuals. The plaintiff is in his mid-50s and the defendant is about 20 years younger, so in business terms, he belongs to a different, subsequent generation. He is an overseas Chinese who was born in Switzerland where his parents had gone to live. He went to school there and for some of the time was at a Swiss boarding school. After school he pursued an American university education, firstly graduating with a degree in mechanical engineering, from perhaps a less well-known university, and then he went to Stanford University where he obtained a M.Sc in Engineering Economic Systems and Applied Mathematics. In 1990, he obtained his first employment which was in San Francisco at a top management consultancy, starting as an analyst and then moving up to become an associate. He left in 1992 and went to Beijing where he learnt Mandarin, and in 1993 he joined Swiss Bank Corporation in Hong Kong as an associate dealing with Risk Management. He came to Hong Kong, well qualified and as a fluent speaker of English, French, German, Cantonese and, presumably, effective Mandarin. He moved up within the bank and became a director in Capital Markets Derivative Products. In this work he was required to deal with substantial transactions involving wealthy individuals as well as other banks and companies. Not surprisingly therefore, and as he admitted in cross-examination, he is well-versed in how companies operate. He is a married man. His wife, Karin, is also highly qualified, a graduate of Stanford and a grand daughter of, until his death in the recent past, one of Hong Kong's most distinguished residents both in business and in its civic and political life. His name appears in the evidence. I mention this connection because, as will become apparent presently, it is a real factor in the defendant's case on duress which I will have to investigate in some detail in the course of this judgment. 6.The plaintiff is a vastly experienced man. He belongs to an older generation. He graduated from Berkeley in 1971 with a degree in Applied Mathematics. He returned to the United States in 1974 for two years to do research at the University of Oregan. He has held senior corporate positions in Hong Kong including a 10 year career, from 1987 to 1997, as a Director and Company Secretary of the Lai Sun Group of companies which is, of course, a well-known and significant public company. Since then and until the present time, he has operated his own private company which provides financial and management consulting services. 7.I have also had evidence from three other witnesses about whom I will need to make reference, in a case which turns so much on the credibility of the witnesses. THE MAIN ISSUE 8.The outcome of this action turns on the view that I form, as to fact and its effect as a matter of law, of an extremely long meeting between the parties and their then associates, Mr Raymond Lee ("Raymond") and Mr Thomas Yau ("Thomas"). The meeting itself started at about 2:30p.m. on 29 December 2000 and finished just over 12 hours later at 2:45a.m. the following day, culminating in the signature by the plaintiff and the defendant of the Agreement now under challenge. Unfortunately, I am not able just to relate the events of those 12 hours. It is necessary to say something about the structure of the parties association and the events leading up to this meeting much of which is the subject of serious dispute. I am required to make some findings of fact concerning these matters, as well as crucial findings about the course of the meeting itself. THE PERSUASIVE BURDEN 9.A party who asserts duress bears the burden of proof. In those circumstances, counsel have rightly agreed that the defendant should go first. Mr Rimsky Yuen who appears for him therefore had the right to begin and I have therefore received the defendant's evidence before that of the plaintiff. HOW IT ALL STARTED 10.In the course of their friendly conversations over the months that they socialised with each other, the parties came to exchange opinions and ideas about commercial life and business opportunities. In about October 1998, the defendant decided that he would like to start up an incentive and prize-based internet company with prizes coming from lottery draws. He called it Mylotto Capital Limited ("Mylotto") and acquired an internet domain for it called mylotto.com. In March 1999, he set about incorporating an offshore company and the plaintiff put him in touch with Messrs Yip Leung & Company, accountants, who through their associates, Hoey Nominees Limited, incorporated Mylotto as a BVI company. He was its sole shareholder and his wife Karin and he were appointed its only directors. This took place on 15 April 1999. 11.At about this time the parties became serious about a joint business investment. The plaintiff asked the defendant to let him have a note as to his investment strategy. The defendant replied by e-mail dated 19 April 1999 which appears at B:43. Most of this bears repetition here :
THE USE OF MYLOTTO CAPITAL LIMITED 12.By about May and June 1999, the defendant abandoned his idea of establishing a price-based and incentive marketing company. He says that as he already had Mylotto in place, he decided that he would use it as a nominee to hold his investments. His case is that he and the plaintiff also agreed, very much as a matter of convenience, to use this company to hold any of the investments that they chose to make together. Whilst the plaintiff substantially agrees with this there is the sharpest dispute as to the extent of the plaintiff's position within this company. He says that the defendant had agreed with him that he would be a 50% shareholder in Mylotto as well as a member of the board of directors - that is what he understood the defendant to mean when he told him that he would be a director and produced a visiting card for him describing him as an Executive Director. This dispute requires resolution by me because if the plaintiff is correct then this provides real substance to his case that the defendant had seriously misled him and left him unprotected as to ownership of their only investment, as things turned out, namely Softlink Medical Limited. I will leave over resolution of this until after I have recounted the other essential parts of the evidence. 13.The first prospect for joint investment was a company called JobAsia Limited. This was an internet company providing job recruitment services founded and operated by Mr Bosco Lam who was known to both of the parties. The matter was given careful consideration but in the end nothing came of it. SOFTLINK MEDICAL LIMITED 14.The next serious investment was Softlink Medical Limited ("Softlink"), a company that was established in Hong Kong in January 1999 by Raymond and Thomas. Its business concerned the development and leasing of clinical management computer software for use by doctors and dentists to assist in the running and administration of their medical and dental practices. It is this investment which has really brought about this action. 15.The defendant was first introduced to Raymond by a mutual friend on 2 September 1999. General discussions took place about what Softlink did. The defendant became interested and told the plaintiff. Further discussions and e-mails were exchanged between the parties and Thomas and Raymond. As negotiations progressed, it was agreed that the defendant should organise a visiting card for the plaintiff in order that he might have a more visible and official presence on behalf of Mylotto in the course of the discussions. This is the card which described him as an Executive Director of Mylotto. The status of this title is in dispute and I am required to give this further consideration presently. 16.By late October, the parties had agreed between themselves that, having studied the prospects, an investment in Softlink should go forward. The method and structure of their investment has been the subject of much debate in the course of the trial. The defendant says that they agreed to jointly invest in Softlink by joint subscription for 45,000 Softlink shares at a cost of $3,000,000. Each would put in half of that amount as well as any incidental costs. The shares would be held by Mylotto in trust for both of them. It will be recalled, of course, that the defendant was the only shareholder in Mylotto. 17.The plaintiff's account is fundamentally different. He says that they agreed that he was to become a 50% shareholder in Mylotto as well as becoming a director of the company. He thought that this had been done until he discovered the truth late in 2000 which I will need to consider in due course. He accepts that these 45,000 Softlink shares were to be held by Mylotto but on the basis that he owned half of the company. 18.This acquisition of 45,000 Softlink shares was formalised on 17 December 1999 under the terms of a subscription agreement signed at the offices of Messrs Richards Butler, Solicitors, by the parties and Thomas and Raymond. The relevant documents are exhibit NV6B:89. By a resolution of the Mylotto board passed on the previous day, the defendant signed for the shares on its behalf. NV7B:184 is where these documents are to be found. The plaintiff and the defendant also became directors of Softlink. 19.On the allocation of the $1,500,000 that each contributed to the purchase of the 45,000 Softlink shares, the plaintiff's evidence is that each paid this sum to Mylotto as shareholder capital in Mylotto who held the shares on trust for them. Although he was present at Messrs Richards Butler's offices when the formalities were executed, the plaintiff says that he was not aware of, nor was he given for his inspection, the Mylotto board's resolution authorising the defendant to acquire these shares on behalf of Mylotto. 20.The defendant's evidence is that the plaintiff paid $1,527,690 of which $1,475,000 was for the acquisition of the shares (his half) plus a further $40,000 being his share of the legal fees and an additional sum of $12,690 being his contribution for the web site development for Innovasia Venture Partners Limited ("IVP"), which, as I shall explain presently also place a part in this dispute. 21.In December 1999, Softlink moved its offices from Kwun Tong to more comfortable premises at North Point. The defendant says that the four directors agreed that following the $3,000,000 injection into Softlink these funds would be used to expand the company's client base and operations in order to make it more attractive for more investors in a second round of financing which was planned for the second or third quarter of 2000. They divided up their tasks. The plaintiff, with his great experience in management would be involved in the administration and recruitment of personnel. The defendant would take care of business planning and the enlisting of further investors for the second round of financing. Thomas and Raymond would be free to get on with what they were good at and had been doing. Thomas would coordinate the development of the upgraded clinic management software and Raymond would be in charge of sales. THE INNOVASIA COMPANIES 22.The next stage of the parties' business relationship, which also has an important part to play in their eventual falling out, is the establishment of two companies, IVP and Innovasia Inc. In due course, Mylotto changed its name to Innovasia Venture Partners 1 Limited ("IVP1") which also became a source of contention because the plaintiff says that this change of name was effected without him being informed. 23.The first two Innovasia companies was the product of the parties' decision to expand beyond their Softlink investment. The concept, which was decided on in about October 1999, was that they would seek funds from investors, not just directed to individual start up companies, but the accumulation of funds which would be directed to making venture investments. According to the defendant, their agreement was that "Innovasia" would be used as a brand name for three companies. Firstly, an offshore company which would be the venture investment fund ("the Fund"). Then another offshore company which would manage the fund ("the Fund Manager") and lastly, a Hong Kong company to do the administrative work and to advise on the investments of the Investment Fund ("the Operations Company"). 24.I will need to briefly explain the structure of these companies as between each other. The defendant says that the Fund would pay the Fund Manager a management fee consisting of an annual fee and a performance fee for managing the Fund. For tax purposes the Hong Kong Operations Company would act as a cost centre on a breakeven basis. The Fund Manager would reimburse its operation costs and keep the net profit, if any, being the performance fee which would be shared by the General Partners which was the proposed title to be given to the partners who were to become equity shareholders of the Fund Manager when the Fund had been raised. 25.This scheme went forward. From October 1999 to January 2000, discussions were held to find suitable partners. A Mr Victor Koo was approached as was a company called Asiatech, a specialist venture capital company, but nothing came of these discussions. At the same time, Ms Ophelia Ngan ("Ophelia"), a friend of the defendant and of his wife from Stanford days was also drawn into it. She has given evidence, having come from the United States to do so, which I will need to consider shortly. Suffice it to note for present purposes that she is a highly qualified person. She was the Marketing Director of the Online Services Division of AT&T Asia Pacific. OPHELIA JOINS 26.Ophelia was persuaded to join the parties in this arrangement. Her involvement was firmed up in December 1999. She was to become an employee of the Operations Company which was to be called Innovasia HK Ltd ("IVP-HK"). She would not be required to contribute any capital, but because of her experience and expertise in the telecoms and internet industry she would be made a General Partner. She was seen as a person who would be in a position to make a significant contribution to the raising and management of the Fund. In February 2000, she was formally employed at a monthly salary of $51,700 and given a signing on fee of $155,000 to compensate her for the fact that her pay was to be lower than at AT&T. IVP-HK was established on 24 January 2000. The parties each held the 50% shareholding and were directors. About this there is no dispute. The other matter that I need to refer to concerning Ophelia's engagement was that the parties agreed that if and when the fund was raised then the parties and Ophelia should have an equity stake in the Fund Manager in the following proportions :
Ophelia's interest was to be in recognition of her expertise and as an incentive to secure her participation. IVP-HK 27.Following the formation of IVP-HK, the parties came to an agreement as to how the company was to be funded in the initial stages. As with the Softlink investment this also required a considerable capital injection from the two of them. The defendant says that the following was agreed :
28.From February 2000, the operations of IVP-HK began and a web site was launched. Responsibilities were allocated to each partner. The plaintiff dealt with the administration, salaries and accounts which was his distinct forte and the defendant and Ophelia concentrated on raising funds and trying to bring investors on board. 29.As will become only too clear presently neither the Innvoasia companies nor Softlink were able to really get off the ground. For both parties, these ventures proved to be a considerable financial drain with no positive results being derived by them despite their expertise and considerable effort, as well as that of Ophelia, Thomas and Raymond. 30.I now need to describe, as briefly as I can, the course of these failures which eventually resulted in the break up of the parties association, the agreement of 29 December 2000 and this action. INNOVASIA INC. 31.In March 2000, the defendant formed Innovasia Inc. this being a Cayman Islands company. Its purpose was to manage the venture investment fund. Its certificate of corporation is at NV14B:225. The defendant was its sole shareholder. He, the plaintiff and Ophelia were its directors. The fund itself was to be another company registered in the B.V.I. to be called Innovasia II Limited. Because the fund did not materialise that company was never formed. So far as Innovasia Inc. was concerned that remained a dormant company because the fund never eventuated. Neither party was required to advance it any funds. MYLOTTO CHANGES ITS NAME 32.On 27 March 2000 Mylotto changed its name to IVP1. The relevant papers relating to this are NV16B:254. There is a sharp conflict on the evidence as to whether the plaintiff was informed about this. He says that the defendant did this without telling him and that this was part of the defendant's deception which would have left him out in the cold without any legal standing or redress particularly if their collaboration had become a profitable one. The defendant and Ophelia have maintained that the plaintiff had been consulted about this during the course of their regular partners meetings. Ophelia in particular has been very firm in her evidence that on something as significant as a change of name the plaintiff was fully in the picture. This change was part of the "branding" process for the Innovasia group and it is inconceivable that he had not been told about it. In support of this, the defendant has also produced as NV17B:258; the papers relating to the change of name and the invoices from Hoey Nominees Limited for the fees incurred in dealing with the necessary formalities. These fees were charged to IVP-HK and the invoices were sent to the plaintiff to settle, he being the person in charge of the accounts. As to this, the plaintiff says that although he signed the relevant cheques, these had been prepared, as usual, by the secretary and he was not aware that these related to the specific matter about which he remained in the dark. ATTEMPTS TO MAKE INVESTMENTS 33.Alas, without success, serious attempts were made during the first half of 2000 and into the summer of that year to attract investors. It is not necessary to detail what had been done because such matters have no bearing on the issues that I need to resolve. CASH INJECTIONS 34.Both parties have lost substantial amounts of money by investing in Softlink and the Innovasia venture. Apart from their initial subscription of $1,500,000 for their shares in Softlink, the plaintiff also injected a further seven amounts in the company to keep it going between 30 May and 30 December 2000, totalling $1,600,000. These injections of cash were expressed to be shareholder's loans. His total outlay in Softlink amounts to $3,127,690. The defendant has made an additional injection of $200,000 on 1 November 2000 which he has expressed to be a loan from IVP-HK to Softlink. That is disputed by the plaintiff who says that these were the defendant's funds. Whatever its precise provenance, this $200,000 is the defendant's. Their combined "investments" in Softlink therefore amounted to $4,855,380, which is no mean sum to pay out for no return. 35.As to the Innovasia companies, the plaintiff made two payments to IVP-HK being $450,000 on 29 January 2000 and a further $500,000 on 25 March. These two payments were regarded as shareholder's loans. The plaintiff's total outlay therefore comes to $4,077,690 and all of this put out and effectively lost in the space of 12 months from December 1999 to December the following year. The defendant's investment in Innovasia was far greater than that of the plaintiff. Between February 2000 and October 2000, he put in just under $2,400,000 into IVP-HK as shareholder's loans. His total outlay therefore comes to $4,127,680 which is $50,000 more than the plaintiff. So when the parties came to discuss their situation on 28 December, they had between them lost $8,205,370, if one adds in the $300,000 that the plaintiff paid into Softlink the following day. I will need to return to the significance of these figures presently. THE RELATIONSHIP BECOMES STRAINED 36.I suppose, almost inevitably, the failure to raise the hoped for fund for Innovasia to go forward with venture investments and the accumulating losses at Softlink resulted in disenchantment on the part of both parties and the plaintiff in particular, as I judge the situation. On the Innovasia side, the plaintiff was advising that its unnecessarily large 7,000 sq. ft. office should be sublet to reduce costs. It also employed more staff than was necessary given its inability to attract investment. The plaintiff complains that his advice went unheeded by the defendant. On 8 September 2000, the plaintiff announced that he was severing his links with Innovaisa. He handed over the cheque book and the other documents that he had charge of in administrating IVP-HK and in doing its accounts. At that stage he wished to concentrate his efforts on the operations of Softlink that was not fairing at all well. The defendant accepted that position and by an e-mail dated 18 August he had already told the plaintiff that he would be bearing all of the IVP-HK expenses himself. This e-mail was at about the time that the parties, together with Ophelia, had met to discuss IVP-HK's inability to raise the fund. Thereafter everything happened quickly in terms of IVP-HK's shut down. Ophelia resigned in September and left in October. Her departure was really the final curtain so far as the IVP venture was concerned. 37.From October matters moved rapidly. Differences began to emerge between the parties themselves and between the defendant and Thomas and Raymond as to how Softlink was being operated. E-mails were sent to the defendant by Raymond chastising him for the way he was seeking other investors in Softlink and not consulting the other directors. Softlink was in urgent need of further finance by then. The defendant was asked for a further cash injection. He was not at all keen on making any further payments at this stage unless the company's monthly expenses were drastically reduced from $300,000 to at least $200,000. 38.Then, as I judge it, with the ship beginning to list rather badly, came the request by the plaintiff to have his 22,500 shares in Softlink transferred to him personally. This happened on 23 October (2000) - see the e-mail NV25B:310. If the plaintiff is right, it is this request that set in trend a series of events which resulted in him, for the first time, becoming aware that he was not a shareholder or a proper member of the board of Mylotto (now IVP1) which he had not been informed had undergone the change of name. Because the plaintiff wished to hold these shares in Softlink personally rather than having them held on trust on his behalf by Mylotto, it was agreed that a new shareholder's agreement would have to be drawn up for Softlink. Messrs Fok and Johnson, Solicitors, were asked to prepare the necessary documents. 39.The plaintiff's account is that once the new shareholder agreement had been prepared, a meeting had been scheduled to execute it on 21 December. But before that on 15 December, he met the defendant at Softlink's offices who presented him with two sets of documents for his signature. One set related to IVP Inc. including a letter of resignation as a director. He says that he then asked about his shareholding in the company and he learnt for the first time that he was not a shareholder. This had come as a complete surprise to him and he felt cheated. On this the defendant says that because IVP Inc. was a Cayman company, the usual practice of that jurisdiction was to offer just one share initially. Because the parties had agreed that nothing was to be done unless and until a fund had been raised, it was unnecessary at that stage to go further. More shares would have been issued to reflect the parties proper interests when the fund had been raised. He says the plaintiff was well aware of this. 40.The greater shock, according to the plaintiff, came when he was shown the next set of documents which related to IVP1, the old Mylotto. One document was a board resolution signed by the defendant and by Karin whereby IVP1 would sell 22,500 shares in Softlink to the plaintiff for one dollar. There was also a sale and purchase agreement relating to those shares. First, he asked who IVP1 was and the defendant told him that this was Mylotto's new name. This was the first that he had heard of that and that Karin was involved in the company as a board member. The bigger surprise was that he learnt for the first time that he was not a shareholder of the company. All of this was quite contrary to what he had understood the position to be from the inception of their relationship. It meant that ever since they had started he had no legal basis for his ownership of the shares in Softlink. He had been entirely dependent on the goodwill of the defendant save for some nebulous fall back on a constructive trust without the support of any trust document. 41.The plaintiff sent an e-mail to the defendant requesting a further meeting to clarify the precise terms of the corporate structure. He had signed the letter of resignation from the board of IVP Inc. but declined to sign anything else. 42.On 21 December, the new shareholder's agreement was not executed because a disagreement had emerged between all the parties particularly in relation to the proposed powers to be vested in Mylotto (IVP1) in relation to its right of veto on the board of Softlink. This has been raised in the course of the evidence with particular reference to the defendant's ability to control the decisions of the Softlink board, assuming particular significance when it had been realised by the plaintiff that he had no standing in Mylotto (IVP1) because he was neither shareholder nor a director of the company. This now forms part of the attack on the defendant's integrity: it is said that this is yet another example of his sharp practice. 43.The plaintiff's view of this matter is reflected at paragraph 84 of his witness statement A:-104 :
44.All of this added to the parlous financial state of Softlink, which by December was existing on a hand to mouth basis, meant that the directors needed to have a very serious discussion about where they were going. For the parties there was the question of the transfer of the 22,500 shares and, if the plaintiff was right, where he stood vis-à-vis Mylotto (IVP1) and Innovasia, and for the parties and Thomas and Raymond what was to happen to Softlink, which was by now debt-ridden and without sufficient income to keep it afloat? It is against that background that the parties had their meeting on 28 December. HAD THE DEFENDANT DECEIVED THE PLAINTIFF? 45.In order to determine this I have had to have regard to all the background including, of course, the fact that by the time that they decided to go into business together, the parties had already been friends for about three years and, I have no doubt, trusted each other. I also have no doubt that each respected the other for what he could bring to their association. The plaintiff, I have no doubt, was respected by the defendant for what he had already achieved as a senior executive of a public company. I have no doubt the plaintiff had become impressed with the defendant as obviously an intelligent, highly educated, socially well connected and "switched-on" individual with expertise in the way modern businesses operated. I do not believe that either man thought himself capable of pulling the wool over the other. That is the background as I find it, which in turn sets the scene for the inherent probabilities as one examines the evidence itself and the way in which their evidence has been given. 46.On the question of the change of name of Mylotto to IVP1, I am quite unable to accept the plaintiff's evidence that he was first told about this in December 2000. Mylotto was their main investment vehicle. If the defendant was going to effect such a change of name, I do not believe he would have run the risk of sending all the invoices relating to the change of name to the plaintiff with a view to him writing out the appropriate cheques to Hoey Nominees Limited who had carried out the formalities on his behalf. Although, the plaintiff has said that all he did was to sign the cheques, assuming the invoices were in order, I do not for one moment believe that the defendant could have taken the risk that the original documents would not have come to the plaintiff's attention once he had sent them for the invoices to be settled. That is the first point which tells against the plaintiff. Secondly, I am bound to say that I am most impressed by the evidence of Ophelia who I find to be an honest and entirely straightforward person. She has told me that this change of name was part of the "branding" process for the Innovasia group and that something of this importance would have been, and indeed was discussed between the three of them at their regular meetings. I find as a fact that it was so discussed and that at all times the plaintiff was aware that the name had been changed. 47.The more serious allegations concern the standing of the plaintiff in relation to Mylotto. He says that he understood that he was a shareholder and a member of the board. He was very effectively cross-examined, by Mr Yuen on behalf of the defendant, to the effect that had he been a shareholder and a member of the board, he would have been required to sign the appropriate public documents. The plaintiff says he has no recollection about that. In my judgment, it is inconceivable that he would not have remembered such a thing if in fact he had been told that he would become a shareholder and a member of the board. These are the sort of documents which the plaintiff has lived with for all of his working life as a company secretary. I believe that it is inconceivable that he would not have recollected whether he had signed such documents. I simply cannot imagine that the defendant would have told the plaintiff that he was to become a shareholder and a member of the board and not done anything about it. I am convinced that if the defendant had made such representations to the plaintiff, the plaintiff would have picked him up on that within a matter of days or at best weeks to remind him that the appropriate documents needed to be executed by him. All the inherent probabilities favour the defendant's account, for the general reasons that I have given, and also for these particular reasons which I have now referred to. The truth of the matter is that the defendant, whose evidence I accept on this point, had made it clear to the plaintiff that Mylotto was his company and that it was a "clean company" and therefore a convenient vehicle for them to hold their investment in Softlink shares for the time being, and I am also convinced that the defendant respected the fact that half of those 45,000 shares were being held by Mylotto on trust for the plaintiff, and when the time came for the plaintiff to require his shares the defendant immediately took steps to bring that about. In any event, had the defendant promised the plaintiff a 50% shareholding in Mylotto and a seat on the board, I would have expected reference to it to have appeared in the contemporaneous papers, be it letters or an e-mail or some note of a permanent nature. There is nothing there and the reason why that is so is that this promise was never made. I am perfectly satisfied that the plaintiff was fully aware of his situation so far as Mylotto was concerned, and that he trusted the defendant when they initiated their business venture that once things really got going that then the matter would be formally regularised between the two of them and I am perfectly satisfied that the plaintiff at the time trusted the defendant to carry out those promises. As to the question of a seat on the board, there has been a certain amount of discussion as to whether "director" or "executive director" means a member of the board of directors. One knows that in modern business practice, with a fondness for companies to give people titles in order to make them feel important, that the expression "director" has now taken on something of a diluted meaning and it certainly does not necessarily mean a member of the board of directors. In this regard, I again entirely accept the defendant's account of it that he prepared a visiting card for the plaintiff and described him as an executive director in order to give him some formal title and "presence" in relation to Mylotto whilst the negotiations with Raymond and Thomas were going forward over the acquisition of Softlink shares. And so on this issue, I am firmly of the view that the plaintiff's evidence is not correct. 48.There is also the issue of whether the defendant had also told the plaintiff that he was to be a shareholder in Innovasia Inc. The defendant has said, as I have already described, that with a Cayman Islands company off the shelf, the usual practice is that just one share is allotted. The plan was that once the Fund had been raised then arrangements would have been made for the appropriate number of shares to be issued to the plaintiff. Before the Fund was raised that would have been wholly unnecessary. Again, Ophelia's evidence is of assistance. She has given evidence, the effect of which is that everybody involved, that is to say, the three of them, were very much aware of what was going on as between them. I accept her account of it, confirming as it does what the defendant has also told me. The plaintiff asks rhetorically : "Would I, an experienced businessman, have countenanced going forward with what were large injections of cash unless I was satisfied that I was amply protected by shareholdings and membership of the board and so forth?" That, of course, is a fair observation to make but where people do operate on trust as, I have no doubt was the case here, such otherwise proper precautions would be considered unnecessary. Particularly here, where before the necessary Fund had been raised, there really was not very much to get excited about. The plaintiff has made the point that he would have been completely unprotected if these ventures had become successful. But it is my view that experienced man that he was, he trusted the defendant to do the right thing and I believe, having seen the defendant and what he has said, and the nature of their relationship over the 15 months or so that these ventures were going on, that the defendant would indeed have honoured his obligations. 49.For these reasons, I have come to the firm conclusion that at all times, the plaintiff was aware of the legal position and that there is no question of his having been deceived about these matters by the defendant. The effect of these findings is to enhance the credibility of the defendant when I come to decide precisely what occurred during the course of the meeting of 28 and 29 December and, equally, I must remind myself that these evidential issues have been decided against the plaintiff. That, having been said, these findings will not of themselves have a direct impact on whether duress or, indeed, a total failure of consideration has been made out by the defendant. These are pure points of law although, of course, points which can only be resolved against a factual matrix. Before I consider these purely legal issues, I ought to first decide precisely what was said, or not said, or done during this crucial meeting. THE MEETING OF 28/29 DECEMBER 2000 50.I am satisfied that the background to all of this was that the plaintiff had decided that he had, after all, made a bad investment and no doubt regretted having gone in with the defendant. The figures which I have added up speak for themselves. He had also decided in my judgment that the Innovasia side of things was to be left with the defendant and that he would try and come to some sensible arrangement with Raymond and Thomas on Softlink which, although of course in very serious trouble, had a working base. So, in my judgment, his mindset was to try and get back as much of his lost investment as he could from the defendant. That is a perfectly understandable approach for any businessman or investor to take. The question here is whether the means by which he went about this have gone beyond what the law will countenance. I am satisfied that in the course of the year, the plaintiff had established a reasonable rapport and working relationship with Raymond and Thomas. They operated on the same wavelength which was not the case with the defendant. His approach was perhaps more independent and he was perhaps less of a team-player. That was clearly not appreciated, certainly not by Raymond and Thomas. I have no doubt as to whose side of the argument they were on when it came to resolving the mess that Softlink had found itself in. As will become clear in a moment, the defence of duress is not one which the law recognises lightly but it is against the background of, if not overt hostility, certainly a degree of antipathy, between the plaintiff, Raymond and Thomas on the one hand and the defendant on the other that this meeting took place. 51.I also have no doubt on the evidence that the plaintiff had a settled plan in mind as to what he was hoping to achieve. He required a clean break from Innovasia and to get back as much of his lost investments as he could from the defendant. 52.The defendant's evidence is that he was subjected to the combined pressure of the plaintiff with the assistance of the other two. If the defendant is right about this, the plaintiff saw that there was benefit to be derived from the fact that there was nothing formal in place between him and the defendant, and he sought to use that as a means of applying pressure in the course of the negotiations. The defendant's evidence is that the plaintiff told him that the non-existent corporate structures representing their respective interests amounted to fraud on his and his wife's part. And that this was a very grave situation. During the course of this very long meeting, it had been suggested to him that he might even have to go to prison and that this criminality also extended to his wife, Karin and their friend, Ophelia. It is this feature of the evidence which assumes greatest importance in the defendant's case on duress. He was appalled by the prospect that his wife, who comes from such a prominent family in Hong Kong, might find herself dragged before the courts, both criminal and civil, and that he might be the cause of having her family's name blackened in this way. He also felt enormous concern for Ophelia, a respectable person, an old friend of theirs, someone who in his mind had been totally innocent of any wrongdoing and the prospect of her getting involved in some criminal investigation greatly worried him. In addition, he has told me of his own experience before the criminal courts when he had been charged, in the not too distant past, with an offence of indecent assault. He had had to go to the magistrates' court where he was represented by leading counsel. Fortunately, the matter was resolved in such a way that there was no conviction, but he recollected all the unpleasantness and the publicity which that had engendered. Now, he feared that all the details of that incident would be revisited by the press if there was a police investigation about this matter. That is his main point why he put his signature to a greatly disadvantageous financial agreement. In addition to that, he has recounted what he has described as "general oppressive behaviour" created by the fact that there was more than one person nagging at him in the course of these 12 hours, insisting that the matter be settled in a way which required him to pay out a great deal of money. He has relied on the fact that this was an extremely long meeting and that he was overborne by the whole experience, in addition to the particular unpleasant threats that he has recounted. So, by a process of pressured negotiation where the financial stakes were upped as the day and night progressed, he eventually signed the Agreement that is the subject of this action. 53.The other side of the argument comes of course from the evidence of the plaintiff and from Raymond. Not surprisingly their version differs very substantially. The plaintiff readily concedes that he had indicated to the defendant that if there had been wrongdoing, it was certainly something that he was going to take up with his own lawyers and the legal consequences would have to be faced up to by the defendant, but beyond that, there was no improper pressure applied. He accepts that he was in a "determined mood", not that these are the particular words that he used, but that he was anxious that this matter needed to be settled at that meeting no matter how long it took. The position was urgent, Softlink required funding the next day if it was going to continue operating and he had to achieve a clean break between himself and the defendant. His evidence is supported by that of Raymond and also, to some extent, by Thomas who did not come to give evidence himself, but his statement has been admitted. Clearly, less weight is to be attached to Thomas' evidence because I have not had the advantage of seeing him come and give that on oath and be cross-examined on it. 54.Raymond, who has given evidence, says that this was a perfectly normal business meeting, albeit of course a long one, but he did not find that especially remarkable. He has said that this was a proper negotiation at arm's length and that when it came to the actual drafting part of the exercise towards the end of the meeting, that the defendant himself played a very prominent part in the drafting, which would indicate that he was very much on top of the situation and certainly was not feeling that he had to enter into an agreement at all costs. WHOSE EVIDENCE DO I ACCEPT? 55.I need to warn myself that it is a very easy thing for an individual to repent shortly after he has entered into a bargain which he greatly regrets. What is plain is that within a matter of a very few days the defendant had gone to see his solicitors and had provided them with detailed instructions enabling them to set out the nature of his case on duress and making it absolutely clear that the defendant was not minded to comply with the terms of the Agreement. Equally, the plaintiff was quick off the mark to see his own solicitors who wrote a firm rebuttal and it is also worthy of note that the writ was not long in coming thereafter. So, after the event, both parties can claim to have acted in a way which is totally consistent with their version of events. 56.Mr Yuen has also invited me to look at the Agreement itself, which of course I have. His comment is that when one analyses it, traffic is all one way. The defendant has given absolutely every thing that was there to be given and got nothing in return to speak of. And he asks the rhetorical question whether any intelligent individual in the defendant's position would put his signature to such an agreement unless something untoward had caused him to agree to these terms. 57.I do not accept the version put forward by Raymond as to this meeting. I take him first because, if anything as between him and the plaintiff, his account is the more extreme. He has invited me to accept that this was a perfectly normal meeting and that it was conducted on the basis of an arm's length negotiation. I do not for one moment accept that this can properly be described as a perfectly normal meeting. The plaintiff himself does not go that far by any means. He has indicated that the matter was urgent and that he required a solution. 58.I prefer the evidence of the defendant as to the general thrust of the encounter. None of the witnesses has been able to recount in precise detail, everything that went on over a meeting lasting for more than 12 hours and it would have been very surprising if they had been able to do that. Nevertheless, in a situation where on my view of things the plaintiff had come, determined to get back as much as he had lost after what had proved to be a most unwise series of investments, he is experienced enough to know and realise that there was an advantage to be had out of the fact that the corporate structures, which would have been put in place had every thing really got going, were not in place. He, I have no doubt, used that in order to suggest impropriety on the part of the defendant and those most closely associated with him, his wife and their friend, Ophelia. 59.I have formed the impression that the plaintiff is an able and skilled negotiator given all his years at the top end of commercial life here in Hong Kong. He went into this, determined to use what he considered legitimate arguments to persuade the defendant to give him back as much of his original investment as he could extract from him. I have no doubt that in the course of these discussions, the defendant was told that the position was highly irregular and that this might have to go as far as the police. The defendant has told me that it got even more unpleasant than that when it had been indicated to him that he would have to "sit" for this - meaning "go to prison". It is this that made a particular impression on him. 60.I accept that in the course of these tough negotiations, the plaintiff went so far as to say that to the defendant. This is not a finding that I make lightly in respect of a person of the plaintiff's impeccable character and standing. But I am convinced that he saw this as a perfectly legitimate comment to make in order to lend force to what he was seeking to achieve. In the event, this and all the other circumstances which I have described surrounding the conduct of this meeting, caused the defendant to capitulate. 61.When one looks at the Agreement itself, it is, of course, rather unreal when one views it against what had passed between these two men over the previous 15 months or so. There is no question that the defendant had to repay "a loan" to the plaintiff as expressed in the Agreement. There had been no such loan but, given the lateness of the hour and the need to put something down on paper which had the effect of obliging the defendant to pay the plaintiff money, this was the formula which was used. It is significant in the sense that it indicates to me the sort of pressures that were being brought to bear. 62.From those findings, I now need to consider the two legal issues that had been raised on behalf of the defendant, that is to say, duress and/or a total failure of consideration, and to determine whether the facts as found by me would entitle him to take advantage of either of those defences. THE LAW Duress 63.I have been very helpfully addressed on this by both counsel. It is clear from the authorities that the defence of duress, whilst available to a party seeking to avoid an agreement, is not one which the courts will uphold unless it has been persuasively made out on the evidence. The issue is extensively discussed in the current edition of Chitty, Vol. 1, at chapter 7. At 7-002, there is discussion of the criminal case of Lynch v. D.P.P of Northern Ireland [1975] AC 653 which was concerned with the defence of duress in the criminal law, but notwithstanding that and the recognition that there are important differences between the civil and the criminal law on what can constitute duress the case is considered useful because "the case contains by far the most extensive analysis of the juridical nature of duress in the law reports, and on this question, there appears to be no difference between the criminal and the civil law". 64.In considering the matter, all five members of the court rejected the notion that duress deprived a person of his free choice or made his acts non-voluntarily.
At 7-003, the classic case of duress is described not as coming about from the lack of will to submit but the victim's intentional submission arising from the realisation that there is no practical choice open to him. The weight of authority has been to apply the test of whether the victim had a practical choice. At 7-006, consideration is given to pressure and threats. This bears repetition here :
With these sentiments in mind, Mr Yuen has drawn attention to a number of cases such as Williams v. Bayley (1866) LR 1 HL 200 and Mutual Finance Limited v. John Wetton & Sons Limited [1937] 2 KB 389 where the threat of prosecution of a family member caused a party to assume a legal liability which he would not have done but for that threat. The case of Kaufman v. Gerson [1904] 1 KB 591 is also to the same effect. 65.As against that, Mr Chan Chi Hung, on behalf of the plaintiff, has drawn attention to the cases which undoubtedly show that, as a general rule, to threaten with civil proceedings would not amount to duress nor would the threat of a criminal prosecution provided that there was sufficient ground for such a prosecution. In this regard, the case of Fischer & Company v. Apollinaris Company (1875) 10 Ch App 297, at 301-303 is very much in point. 66.Here, the essence of the defendant's case is that what the plaintiff was making were illegitimate and unfounded accusations of impropriety amounting to fraud for which he would instigate both civil and criminal investigations, not only against the defendant himself but against his wife and their friend, Ophelia. Those matters set in train fears that he would be exposed to the media publicity which he had suffered as a result of his previous criminal prosecution and that this would also draw in not only his wife but also her distinguished family as well as a totally innocent individual, such as Ophelia. It is the weight of those factors against a background of a pressured situation extending over 12 hours which, in effect, left him with no practical choice but to submit to a highly artificial agreement when one considers its terms against the reality of the situation. 67.In my judgment, the defendant has carried the burden of demonstrating that he was subjected to duress for those reasons and that, consequently, he should not be held to this Agreement. In coming to this view of the facts, I am satisfied that whilst perhaps the plaintiff, Raymond and Thomas had not planned in advance how this meeting was to proceed on a blow-by-blow basis, the fact is that they were very much on the same side and their combined efforts had the effect of persuading the defendant that he had better sign up to the Agreement. I have been conscious throughout of the fact that the plaintiff is a sophisticated individual who has conducted any number of commercial negotiations on behalf of his employers and no doubt on his own account. But I am equally satisfied that he has never before had to withstand this type of pressure, particularly when his Achilles' heel was struck in the form of the prospect that he and those close to him might well be exposed to the indignities of an, albeit false, accusation being made to the police as well as any additional civil litigation that might follow. 68.The effect of those findings therefore is that the plaintiff's claim must stand dismissed, and I shall make the declaration sought by the defendant -- if that is thought necessary -- under the counterclaim that the Agreement of 29 December 2000 is not enforceable. TOTAL FAILURE OF CONSIDERATION 69.That being the case, it is unnecessary for me to consider whether the claim would have succeeded or failed on the basis that the plaintiff had failed to provide valuable consideration for it. That would only have become an issue if the defendant had not succeeded in showing that he had been subjected to duress in order that he might sign the Agreement. If that had been the case, my findings of fact would perforce have been different and I would have therefore needed to address a different factual situation, particularly concerning the question of whether the plaintiff had felt that he was giving up something in return for what the defendant was giving him under the terms of their Agreement. The whole factual scenario would have been a more subtle one, and so, where it might have been desirable for me to express an alternative view on this second line of defence for the defendant in the event that I might be shown to have been in error in allowing the defence of duress to succeed, in these particular circumstances that is not possible given that I have come to a view on the facts which cannot also lend itself to a consideration of whether there has or has not been valuable consideration moving from the plaintiff to the defendant. The question of consideration simply cannot arise in these circumstances. THE RESULT 70.The claim, having been dismissed, there must be judgment to the defendant together with the declaration that he seeks. Inevitably, costs must follow the event in such circumstances, and so I shall direct that the plaintiff must pay the defendant his costs of this action, to be taxed on a party-and-party basis, if not agreed. In the usual way, this order for costs will be an order nisi.
Representation: Mr Chan Chi Hung, instructed by Messrs Wilson Yeung & Co., for the Plaintiff Mr Rimsky Yuen, instructed by Messrs Deacons, for the Defendant |
Further hearings and rulings under HCA 358/2001