Lau Yiu-long and Another v. Pao on and Others
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CACV000013/1976
Coram: Briggs, C.J., McMullin & Leonard, JJ. Date of Judgment: 5th November, 1976. ----------------- JUDGMENT ----------------- 1. This is an appeal from a decision of the High Court giving judgment to the Plaintiff respondents for the sum of $5,392,800 with costs. 2. At the relevant time the plaintiffs owned all the shares in a private company known as the Tsuen Wan Shing On Estate Company Limited (hereinafter referred to as 'the Shing On'). The defendants were the majority shareholders in a public company known as the Fu Chip Investment Company Limited (hereinafter called 'the Fu Chip'). 3. By an agreement dated February 27th, 1973 the Fu Chip agreed to purchase all the shares in the Shing On. The purchase price was stated to be $10,500,000. At that period of time, owing to the conditions of the stock market vendors commonly preferred payment in shares rather than in money. One term of the agreement stated that the purchase price would be satisfied by the allotment of 4,200,000 ordinary shares of $1 each in the Fu Chip at an agreed market price of $2.50 for each $1 share. 4. The agreement also provided that the closing date for completion was to be March 31, 1973. This was later extended to April 30th, 1973. 5. In actual fact the completion of the sale took place on May 4th, 1973 when 4,200,000 shares in Fu Chip were transferred to Shing On. 6. On the same date, May 4th, 1973, the defendants signed a guarantee in favour of the plaintiffs. This was to the effect that the defendants guaranteed that the value of a $1 share in the Fu Chip would be $2.50 on the following marketing date immediately after April 30th, 1974, i.e. one year after the revised date of the completion of the sale. The guarantee further provided that the defendants would indemnify the plaintiffs for any loss they might suffer if the market value of the shares fell below that price on that date to the extent of 60% of the total number of shares. If the defendants were called upon to indemnify the plaintiffs for any discrepancy the defendants would have the option to purchase 60% of the shares, i.e. 2,520,000 shares at $2.50 i.e. $6,300,000. 7. On the date in question, May 1st, 1974, the market price of one Fu Chip share was 36 cents. The plaintiffs therefore claimed $5,392,800 i.e. the difference between the then market price of the shares at 36 cents per share and the guaranteed price of $2.50 per share. As I have said, judgment was given for the plaintiffs in that amount. 8. It was the contention of the defendants that the consideration stated in the guarantee was past consideration and hence no consideration: and that the plaintiffs could not succeed. However, the trial judge allowed extrinsic evidence to be called to explain the meaning of the guarantee. And he held that the guarantee was given for good consideration after considering such evidence. The first point for decision is, therefore, : "Was the trial judge right to allow such evidence to be called?" 9. The Shing On and the Fu Chip were not parties to the guarantee. It is addressed by the defendants to the plaintiffs and the relevant part reads as follows:-
10. There is no doubt that on its face the consideration expressed is past consideration. 11. The trial judge allowed evidence to the effect that contemporaneously with the signing of the agreement to sell the shares on February 27th, 1973 (which I shall refer to as 'the main agreement') the parties signed a second agreement (which I shall call 'the subsidiary agreement'). By this subsidiary agreement the plaintiffs agreed with the first defendant to sell back 60% of the Fu Chip shares at the agreed price of $2.50 one year later, i.e. on April 30th, 1974. This subsidiary agreement was cancelled by the parties on the same day as the guarantee referred to above was signed: and the main agreement completed. On the same date, May 4th, 1973 by yet another instrument (which for convenience I shall refer to as "the indemnity") the plaintiffs agreed with the defendants not to part with the 60% of the Fu Chip shares which were the subject matter of the guarantee for one year, i.e. those shares or any part of them were not to be put on the market before April 30th, 1974. 12. After admitting such and other extrinsic evidence the trial judge held that the true consideration for the guarantee was the completion by the plaintiffs of the main agreement, the agreement made by them with Fu Chip. 13. Counsel for the appellants raised six main issues which cover his grounds of appeal and also certain matters raised in the respondents' notice of appeal. 14. These issues are, first, that the trial judge was wrong in admitting extrinsic evidence to explain the clear words of the guarantee. 15. Secondly, even if the extrinsic evidence was rightly admitted, the finding of the judge that the true consideration for the guarantee was the performance of the main agreement was a finding that there was not good consideration since the performance of an existing obligation to a third party does not constitute good consideration. 16. Thirdly, that on the true reading of the facts as found by the judge the guarantee was signed under a threat that unless a guarantee was forthcoming the plaintiffs would not complete the main agreement. And that the court should not and indeed will not enforce a contract made in such circumstances. 17. The fourth issue deals with the question of whether the cancellation of the subsidiary agreement on May 4th, 1973 was the consideration for the guarantee. 18. The fifth issue raises the question whether the indemnity also signed on May 4th, 1973 was the consideration for the guarantee. 19. And finally, the sixth issue: if the correct view is, as the appellants aver it is, that there was no good consideration for the guarantee and it is void, does this revive the cancelled subsidiary agreement? 20. The first issue is, as I have already stated: Was the trial judge wrong in admitting extrinsic evidence to explain the words of the written guarantee? 21. The general rule seems to be that the court will always allow the admission of extrinsic evidence to construe a written contract, to prove the circumstances in which the contract was made, or to describe the factual background to the contract. There is a famous passage in the judgment of Lord Wilberforce in the case of Prenn v. Simmonds(1) which is material here. He said:-
A later passage in his judgment reads as follows:-
22. Both parties knew the following circumstances which preceded and surrounded the signing of the guarantee on May 4th, 1973. In February 1973 the main agreement between Shing On and Fu Chip had been signed and its contents were well known to the parties to this action. The purchase price for all the plaintiffs' shares in Shing On was agreed to be an allotment of shares in Fu Chip at an agreed price. The defendants wanted the plaintiffs to agree that they, the plaintiffs, would not part with 60% of the Fu Chip shares allotted to them for one year; the defendants being keenly interested that the market should not be flooded with Fu Chip shares because they were majority shareholders in that company. 23. There was a discussion as to what would happen if the price of Fu Chip shares fell. And both parties wanted some protection from a possible fall in the value of the shares in 1973-4. It was first agreed that the first defendant would buy back from the plaintiffs 60% of the allotted shares at the agreed price one year after the date of the agreement. This would confer a benefit on the first defendant if the value of the shares in Fu Chip increased. We know now that the price of the shares fell from $2.50 to 36 cents per share. But in February 1973 the stock market in Hong Kong was booming. When the agreement was explained to the plaintiffs in April 1973 they were dissatisfied. What they had always wanted was a straight guarantee. They wanted the benefit of any rise in the shares and to be protected against any fall. 24. The first defendant was anxious for the completion of the main agreement. An announcement as to the terms of that agreement had been made public. Fu Chip is a public company and if the main agreement was not completed it might well affect the price of the Fu Chip shares in the market. There were further discussions and the plaintiffs decided not to complete the main agreement without the guarantee. 25. There were, therefore, two alternatives open to the defendants. They could, because they were majority share-holders in Fu Chip, ensure that Fu Chip sued the Shing On for specific performance of the main agreement or they could give a guarantee to the plaintiffs. They chose the latter course because an action for specific performance would take a long time and because the giving of a guarantee would not alter the defendants' position save minimally. The defendants would forego the right to buy back the shares if they increased in value. The defendants thought that the shares would not fall in value but, if there was a fall, it would not be by much. 26. The defendants signed the guarantee because he wanted the completion of the main agreement: it was an inducement to secure that event. Hence the guarantee replaced the previous agreement to repurchase the shares referred to above as 'the subsidiary agreement'. 27. On May 4th, 1973, there was an argument as to the share certificates and where they should be kept. This was resolved by the signing of the indemnity to which I have referred above. All this, the signing of the guarantee and indemnity, and the cancellation of the subsidiary agreement was part of the completion of the main agreement. All this took place on the same day, May 4th, 1973. 28. It is the contention of the plaintiffs that the guarantee must be construed against that background. The object for which the guarantee was signed was the completion of the main agreement between Shing On (the plaintiffs) and Fu Chip. The defendants whole purpose was to secure that end. 29. The first words of the guarantee read thus: "..... in consideration of your having at our request agreed to sell all of your shares ....". In the context of the above facts that can only mean "complete the sale" of the shares. And all those facts were known to both parties. 30. The case of Milner v. Staffordshire Congregational Union (Inc.)(2), it was held that "a sale" is made when a contract is entered into. In the guarantee, the phrase "under an agreement for sale and purchase" is used. The guarantee does not provide for the entering into a sale. Under the guarantee the parties are agreeing to complete the sale. The consideration is the completion or performance of the sale. 31. It was pointed out for the defendants that the court will not admit extrinsic evidence to vary or to contradict the written words of the contract: and reliance was placed on Frith v. Frith(3) where it was held in effect that extrinsic evidence would not be admitted to prove a consideration different from that contained in the instrument but would be admitted to show an additional consideration. 32. The rule is expressed in Halsbury (4th Ed. Vo1.12 at para. 1487) as follows:-
33. The defendants say that the effect of the extrinsic evidence in this case is to change the meaning of the guarantee. As drafted, it is argued, the guarantee binds the defendants immediately. The extrinsic evidence converts the guarantee into an "if" contract, i.e. if the plaintiffs complete the main agreement the defendants will be bound by the guarantee. The extrinsic evidence seeks to prove a consideration different from that stated in the document, not an additional consideration to what is there expressed. 34. Various other cases were cited on this aspect of the case. I am satisfied that the law is correctly stated in the passage I have quoted above from Halsbury. The distinction is a fine one. But, in my opinion, the extrinsic evidence was rightly admitted in this case to explain the surrounding circumstances of the guarantee, and the background to it. It was adding to and explaining the terms contained in the instrument. It is proving the real consideration for the guarantee. It is not proving a consideration which is different from that contained in the instrument itself. 35. It is true that the guarantee contains no promise on its face that the plaintiffs would complete the purchase of the shares. Thus, the guarantee can be read as an "if" contract. That is what the parties intended, the evidence clearly shows this. Acting on legal advice, the cancellation of the subsidiary agreement and the signing of the guarantee, the indemnity and the completion of the sale of the shares all took place contemporaneously. The plaintiff and the defendants performing their respective parts of the main agreement. 36. In the event, therefore, I hold that the extrinsic evidence was rightly admitted by the trial judge in this case. 37. The second issue can only arise if it is accepted that the judge was right to admit extrinsic evidence. The judge found that the true consideration for the guarantee was the performance by the plaintiffs in their capacity as Shing On of the main agreement, the agreement with Fu Chip. The point at issue is whether the performance of an existing obligation to a third party can constitute good consideration for a fresh promise. 38. In paragraph 132 of the 23rd Edition of Chitty on Contracts it is stated that there is little authority on this point. The learned editor then gives an example of a case where he considers that a promise to perform an existing duty owed to a third party "should be capable of constituting consideration". The example given is:-
39. This example is very close to the facts in the present case, except that we are here dealing not with a promise not to break the contract with the B company but with the actual performance of that contract. The defendants had an interest in the performance by the Shing On of their contract with Fu Chip because the defendants were the majority shareholders in the Fu Chip. 40. The plaintiffs contend that it is settled law that a promise to perform an existing contract or the actual performance of that contract is good consideration to support a contract with a person who is not a party to the former contract. The defendants' case is that this is not so in every case: that there is no such general rule. 41. The headnote to Scotson v. Pegg(4) reads in part thus:-
42. Wilde, B. is quoted in the report of that case as saying (at p.299):-
In his judgment at p.300, he states the law thus:-
43. This case was held to be good law and was followed in the New Zealand case Satterthwaite v. N.Z. Shipping Company(5). In the present case the benefit to the defendants was the immediate performance of the main agreement and the defendants was not entitled to this in law. The defendants benefited as shareholders. It was this that was the consideration in the present case. 44. An interesting argument was put forward by the defendants. It was that there is no general rule to this effect: each case must be looked at separately because historically the rule is based on reasons of public policy. 45. The old cases of Harris v. Watson(6) and Stilk v. Myrick(7) were quoted as authority for this. These are famous sailor cases, and are authority for the proposition that the performance of an obligation already owed to a person cannot be good consideration for a fresh promise by that same person. The basis for the rule is stated to be public policy. It is urged by the defendants that the same question of public policy arises where there is a promise to perform a duty to a third person or where there is a performance of that duty in consideration for a fresh promise. Further, that the court in the present case should for reasons of public policy hold that the promise to perform the main agreement, since it included at threat not to complete that agreement unless the guarantee was given, was not good consideration for the guarantee. The rule is not that such a promise i.e. to perform an existing obligation to a third party can never be good consideration, it is a matter of public policy. If the courts think that public policy so requires they will hold that such a promise is not good consideration. Every case must be looked at individually. Here, because of the threat of the plaintiffs not to complete the main agreement the courts should hold that there was no consideration. It was admitted that no case directly on this point could be found but the defendants relied on first principles as referred to above. 46. Mr. Balcombe, for the defendants, also referred to American textbook authorities and to the case of De Cicco v. Schweizer(8). It appears from the judgment of Cardozo, J. in that case that at any rate the courts of New York are, in his own words, "committed to the view that a promise by A to B to induce him not to break his contract with C is void." 47. This judgment was explained in Corbin on Contracts at paragraph 177. But I think that paragraph 176 correctly states the modern rule. It reads as follows:-
48. I agree that the three-party cases must be distinguished from the two-party cases. In my view, Scotson v. Pegg(4) is still good law. And, subject to what I have to say below as to duress, I think the Judge correctly held that there was good consideration in this case. The defendants as promisors received a benefit from the performance of the main agreement. They avoided a fall in the value of the Fu Chip shares which might have occurred had completion of the main agreement been delayed. 49. The third issue is: Will the court enforce an agreement which has been made under duress? The word 'duress' being used in the context to mean 'improper economic pressure'. 50. The duress complained of is, of course, the threat that the plaintiffs would not complete the main agreement unless the defendants gave them a guarantee in substitution for the subsidiary agreement. The case for the defendants is that the signing of the guarantee in these circumstances resulted in at least a voidable contract as it was signed under economic pressure. And that the courts will not enforce a contract where that contract has been entered into under economic duress. 51. It was suggested by the defendants that the doctrine of economic duress or business compulsion was part of the law of England. Attention was drawn to the case of Lloyds Bank v. Bundy(9) in which Denning, M.R. suggested that the courts should have power to set aside a contract where there has been inequality of bargaining power and that this should be a general rule. In that judgment, however, he admits that there was no such general rule. Inequality of bargaining power is not of itself a ground for setting aside a contract. It may be an element to be taken into account in reaching a conclusion whether a defence of undue influence, or restraint of trade has been made out; or to decide whether a certain clause in a contract should be construed as a penalty or forfeiture clause. 52. For example, in Schroeder Music publishing Company v. Macauley(10), the point at issue was whether a contract made between a young unknown songwriter and a firm of musical publishers was in restraint of trade. One reason the House of Lords gave for so holding was the inequality of the bargaining position of the parties. But it is clear from the report that this was only one reason for the decision. The duration of the contract and the nature of certain oppressive terms were also given as cumulative reasons for the decision. 53. The ratio decidendi of Lloyds Bank v. Bundy(9) was not an application of the doctrine of economic duress. It was a case in which a fiduciary relationship between the parties was proved and hence a presumption of undue influence arose. 54. In Williston on Contracts, which I understand is a leading American textbook, the following passage occurs at paragraph 1617:-
55. It would appear from this that there may well be such a doctrine as was referred to by Denning, M.R. in Lloyds Bank v. Bundy(9) is part of the law of America or, at any rate, may soon become part of the law. I say this, for there are further passages qualifying the above quotation later in the book. Be that as it may I am satisfied that it forms no part of the law of England. 56. The defendants relied on other cases to advance their argument on this issue. But I do not think that they are authority for the proposition that the doctrine of economic duress exists as part of our law. In Ormes v. Beadel(11) a builder, who was nearly insolvent, and under great pressure from his workmen, who were said to be starving and angry made a contract with the owner's architect who put improper pressure on him (the builder). There was clearly a case of actual undue influence. The case of Rookes v. Bernard(12) was a case which established that the tort of intimidation was an established tort. 57. In the case of D.C. Builder v. Rees(13), the plaintiffs, jobbing builders, were owed a sum of money by the defendants. When the plaintiffs were desperate for money, the defendants offered to pay a lesser sum or nothing. Because of their bad financial position which was known to the defendants the plaintiffs agreed. It was held that they could recover the balance later. The ratio decidendi of this case is that there was no true accord between the parties. The second contract, the contract to accept less than the amount due could not be relied on by the defendants because there was no consideration for it. 58. The next point to decide is: When does a threat to break a contract with a third party constitute duress so as to render any contract made thereafter void or voidable? 59. The defendants placed reliance on the case of Barton v. Armstrong(14). That case clearly shows that the point to be decided is: Did the threat or unlawful pressure appreciably contribute to the decision to enter into the contract? It is a question of fact or of the correct influence to be drawn from the facts in each case. In that case, the appellant was threatened with murder if he would not sign a certain deed. He did sign the deed but the principle reason for so doing was financial necessity. The Privy Council stated the rule thus:
60. A threat must be distinguished from driving a hard bargain. Where a person has two courses open to him and deliberately chooses one course having exercised his own judgment freely beforehand he cannot rely on the fact that there has been a threat to take a certain course, a threat which has not affected his choice. The question here is: Was the refusal not to complete the main agreement more than part of a negotiation between two parties - both of whom knew exactly what they were doing - and who were engaged in hard bargaining? 61. In Williston on Contracts, the following passage appears:-
62. The word used was 'threat'; that word was used by the Judge and also appears in the evidence. It is, perhaps, an unfortunate word to use in the circumstances of this case, having as it does overtures of physical violence. In that sense, of course, there was no 'threat'. Do the facts show that the 'threat' influenced the defendants when they signed the guarantee in place of the subsidiary agreement and the main agreement was completed? 63. It is necessary to go back to the facts of the case. The facts clearly show that the parties were all business people, eager to make the best possible bargain. This was not the case of a giant corporation bargaining with a 'little man'. The parties were equal as to their bargaining power and the Judge so held, though he said that he thought the first defendant was more sophisticated than Mrs. Pao, who conducted most of the negotiations on the plaintiffs' behalf. The substitution of the guarantee and indemnity for the subsidiary agreement cannot be said to be 'unfair' to or an exertion of improper pressure upon the defendants. This was an ordinary business negotiation. No one expected any great fall in the value of the shares at the time. There was no undue haste as to the signing of the guarantee. The first defendant consulted his solicitor and would seem to have exercised his own judgment, and entered into the guarantee with his eyes open and willingly. The guarantee may be said to have been an error of judgment but that can only be said to be the case now, with hindsight. The evidence is that the first defendant thought - at the time of signing the guarantee - that the price of the shares might fall a little during the year 1973-74 but he took that risk, referred to in the judgment as 'a calculated risk'. The defendants were not getting something for nothing. They had no right to enforce the main agreement but they wanted immediate completion of it. For if the plaintiffs failed to complete and Fu Chip brought an action for specific performance against Shing On, the value of the shares of the defendants in Fu Chip might fall, a figure of 20 cents per share being referred to. But this is not to say that if they had taken that course, if they had waited for judgment in an action of specific performance that the defendants would have faced ruin. The defendants appear to have been aware of their position and of the position of Fu Chip when the guarantee and indemnity were signed. They could, in the words of the Judge "have stood firm and caused the Fu Chip to sue the plaintiffs for breach of the main agreement", they chose not to do so. 64. On those facts it seems to me that the correct inference to draw is that the "threat" as such did not influence the conduct of the defendants. 65. It was a case of driving a hard bargain. The parties were of equal status. Each knew what he was doing. And in the words of the Judge 'the defendants took a calculated risk.' 66. It follows therefore that on this issue I do not accept that the 'threat' operated on the mind of the defendants. There was no duress in the sense in which that word is used in this branch of the law. 67. The fourth issue is whether the cancellation of the subsidiary agreement was the true consideration for the guarantee. 68. I do not think that the cancellation of the subsidiary agreement was the consideration for the guarantee per se. Indeed, the judge found as a fact that it was not. However, the cancellation was part of the arrangement for the completion of the main agreement. It was cancelled by mutual agreement as part and parcel of this: it does not stand alone. The consideration for the guarantee was the whole arrangement for the completion of the main agreement of which the cancellation of the subsidiary agreement formed part. 69. The Judge found that the plaintiffs wanted the subsidiary agreement to be cancelled in any event. But there is no evidence that this was what the defendants wanted. The defendants agreed to the cancellation only as part of the whole arrangement. The cancellation cannot be considered in vacuo. To hold that the true consideration for the cancellation was the reliance of the mutual obligation under the subsidiary agreement is against the weight of the evidence. 70. The fifth issue is: Was the true consideration for the guarantee the indemnity given by the defendants on May 4th, 1973? This is a minor matter if only for the fact that the wording of the instrument itself is very difficult to interpret. The plaintiffs appear to have guaranteed that they would not part with their Fu Chip shares for one year but if they did, the defendants would have the option to but back those very shares, the shares which the plaintiffs have already parted with. This is not very sensible. 71. Paragraph (k) of the main agreement reads thus:
72. It is true that if the plaintiffs were in breach of the provisions of that paragraph, Fu Chip would have a right of action against them. And it is also true that the indemnity, like the cancellation of the subsidiary agreement was part of the whole arrangement of the completion. But the evidence clearly shows that the indemnity was, in Mr. Balcombe's phrase 'an afterthought' it was made and signed after the guarantee had been given, and after the cancellation of the subsidiary agreement. I do not think, therefore, that it was the consideration for the guarantee. 73. The sixth and last issue is: If the guarantee is invalid being given for past or for no consideration, does the subsidiary agreement revive? It is unnecessary for me to answer this question as I have already stated that I believe the guarantee to have been given for good consideration. 74. The Judge held that if the guarantee was void the cancelled subsidiary agreement would not revive. He found as a fact that there was an agreement to cancel the subsidiary agreement "in any event". It is clear from the evidence of the first defendant that the cancellation preceded the signing of the guarantee but that the two matters were interwoven. There was to be a replacement of the subsidiary agreement by the guarantee. They were not separate and distinct contracts: the one depended on the other and they were both part of the arrangement for the completion of the main agreement. 75. It was suggested by Mr. Francis, for the plaintiffs, that the Judge drew the wrong inference from the evidence. It is what the parties agreed on May 4th, that matters here: and that the correct inference is that the subsidiary agreement was cancelled as part of the agreement to give the guarantee. And with respect, I agree with him. 76. The defendants relied on the case of Morris v. Baron(15). In that case it was held that a contract for the sale of goods which was evidenced in writing as required by section 4 of the Sale of Goods Act could be impliedly rescinded by a parol contract for the sale of goods which was not so evidenced and therefore unenforceable. 77. Lord Dunedin has this to say at page 27:
And on the following page occurs the passage:-
78. It is argued that though the guarantee was void it would operate to rescind the subsidiary agreement. I do not think that that is so. In Morris v. Baron(15), the second contract was only unenforceable it was not void. The contract was still a contract. A void contract can have no effect. If I am right it follows that if the guarantee was a void guarantee it operated not at all and the subsidiary agreement is still valid. And the rule in Morris v. Baron(15) does not apply. It follows from this that I would dismiss this appeal.
Representation: Balcombe, Q.C., Zimmern, Q.C. & D. Chang (Yung, Yu, Yuen & Co.) for Appellant. Francis, Q.C., Gittins, Q.C. & A. Li (Hastings & Co.) for Respondent. (1) (1971) 1 W.L.R. 1381 at pp.1383-4 (2) (1956) Ch. 275. (3) (1906) A.C. 254. (4) (1861) 6 H.N. 295. (5) (1971) Lloyds L.R. 399 @ p.409. (6) (1791) Peake 102 (7) (1809) 2 Camp. 317 (8) (1917) 117 N.E. Rep. 807. (9) (1975) 1 Q.B. 326 (10) (1974) 1 W.L.R. 1308. (11) (1860) 2 Giff 166. (12) (1964) A.C. 1129. (13) (1966) 2 Q.B. 617 (14) (1976) A.C. 104. (15) (1918) A.C. 1.
Coram: Briggs, C.J., McMullin & Leonard, JJ. Date of Judgment: 5th November, 1976. ----------------- JUDGMENT ----------------- McMullin, J.: The plaintiffs in this action (respondents in the present appeal) owned all the shares in a private company called the Tsuen Wan Shing On Estate Company Limited. In the year 1973 they decided to sell their entire interest in that company to another company, the Fu Chip Investment Company Limited, a public company, of which the two defendants were the majority shareholders and, effectively, the controllers. At the time of the events with which we are concerned the first defendant was in fact the managing director of the latter company. On the 27th February, 1973, the three plaintiffs, the Shing On Estate Company Ltd. and the Fu Chip Investment Company Ltd. were, all three, parties to a written agreement whereby the plaintiffs and their company as joint vendors agreed to sell the 4,000 ordinary shares in the company, its total share capital, to the Fu Chip Company. The stated consideration for this sale was $10,500,000. The purchase price was to be paid not in money but by the transfer to the vendors of 4,200,000 ordinary shares in the Fu Chip Company each share being of a nominal value of $1 per share but each share being deemed, for the purposes of this sale, to have a market value of $2.50 each. Under Clause 4 (k) of the agreement the vendors jointly and severally warranted and undertook with Fu Chip that each of the vendors would retain, in his own right in Fu Chip, 60% of the shares allotted to him under the agreement and would not sell or transfer the same before the end of April 1974. The Fu Chip shares were at that time listed in the Far East Stock Exchange and the stated consideration of 4.2 million shares was a new issue for the purpose of taking over the Shing On Company. On the day upon which the agreement was signed (27th February, 1973) the first defendant and the three plaintiffs entered into a further agreement (which has been referred to throughout these proceedings as the subsidiary agreement to set it off from the main agreement) upon the face of which it appears that the first defendant was undertaking to repurchase from the plaintiffs, on or before the 30th April 1974, 60% of the Fu Chip shares paid to the Shing On Company as the purchase price upon the takeover of that company by the Fu Chip Company the price of each share upon repurchase to be $2.50. 2. Thus far the facts are not in dispute and it is common ground that the reason why the main agreement stipulated that the plaintiffs should retain 60% of the Fu Chip shares for one year was because both parties were hopeful of the continued health and good prospects of these shares and the Fu Chip Company, in particular, did not wish the market to be flooded with Fu Chip shares by indiscriminate selling before they should have achieved their further potential. Following the signing of these two agreements the Fu Chip Company notified the Far East Stock Exchange Ltd. of the takeover represented by the main agreement and on the 31st March, 1973, the Far East Stock Exchange Ltd. approved their application to deal in the new allotment of 4.2 million shares, the purchase price of the Shing On Company. Again, it is not disputed that completion of the sale of the Shing On Company by transfer of its shares by the plaintiffs was not affected within the time limited in the main agreement. The reason for the delay is in dispute but it is common ground that upon the 4th May 1973 at the office of Messrs. Yung, Yu, Yuen, solicitors, the first defendant and the three plaintiffs purported to cancel the subsidiary agreement and the two defendants and the plaintiffs signed a third document, the agreement which is the root of the matter in dispute between the parties upon the present appeal. The form which this agreement takes is the occasion of the first, and chief, of the three principal grounds of appeal put forward by Mr. Balcombe on behalf of the defendants. I shall return to consider the terms of it in due course. It is the foundation of the plaintiffs' claim and it is said by the plaintiffs to represent an enforceable agreement entitling them to the payment of a sum of money equivalent to 60% of the shares at $2.60 a share or $6,300,000 less the alleged value of the Fu Chip shares at the end of April 1973. This agreement takes the form of a guarantee by the first defendant that 2,520,000 shares (the 60% of the Fu Chip shares which, by the terms of the main agreement, the plaintiffs were to retain for one year) will retain their value of $2.50 per share upon the marketing date immediately after the 30th April 1974. This guarantee is coupled with a promise to indemnify the plaintiffs against any damage or loss should the shares fall in value below that price. Finally, it is common ground that the price. of these shares fell disastrously upon the market during the year 1973 and in the early months of 1974 so that the closing market price on the 1st May 1974 was only 36¢ per share. 3. The plaintiffs sought to prove that there had been an oral agreement between the parties whereby the plaintiffs agreed to part with all the shares in the Shing On Company for the price stated in the main agreement and that as a part of this oral arrangement the defendants would guarantee the price of 60% of the shares in the manner stipulated in the document signed on the 4th May 1974. It was their case that the subsidiary agreement had never been properly explained to them and that they had signed under the belief that it contained the terms which eventually appeared in the guarantee. 4. The defendants denied that there had been any completed oral agreement prior to the signing of the main agreement and they maintained that the plaintiffs had been fully instructed in the meaning of both the main agreement and the subsidiary agreement at the time they put their signatures to those documents. The learned trial judge, who analysed and considered the evidence with great care, disbelieved the plaintiffs' story as to the oral agreement and he also found that they were well aware of the nature of the contents of the subsidiary agreement before they signed it. For the defendants it was argued that no good consideration was shown in the document of guarantee and secondly that that agreement had in any event been obtained under a threat to break the obligations imposed by the main agreement and was thus vitiated by a degree of compulsion which resulted in its being unenforceable. The learned judge accepted that the evidence showed that the first defendant had only signed the guarantee out of a desire to have the main agreement brought to completion but he would not accept the argument as to duress. He preferred to take the view that the parties were hard-headed business people, on even bargaining terms, and that there was nothing in the situation of the defendants which imperilled them, or the Fu Chip Company, to such an extent as to compel them to accede to the request for a guarantee rather than seeking to enforce their contractual rights by action for specific performance. It was argued for the defendants in the court below, as it has been before us, that the document of guarantee was complete upon its face and that it was therefore improper to have regard to extrinsic evidence to interpret it or explain its terms in any sense other than the words themselves expressed. On this issue the learned judge took the view that he was entitled to have regard to the surrounding circumstances under which the guarantee had come to be made and, having regard to the whole course of conduct of the parties, what he appears to have found is that the consideration was inaccurately described in the guarantee. He said:
He referred to the principle that extrinsic evidence is not admissible to show a consideration contradictory to the stated consideration but he found nothing in the terms of the document itself which would amount to such a contradiction. It is this finding which raises the first of the six issues argued by Mr. Balcombe and he challenges it in a fundamental way. He does not dispute that it is proper for a court to look at extrinsic circumstances to explain the terms of a document, where there is in it some ambiguity or obscurity, in order to determine what was the true intention of the parties. Such ambiguity simply does not exist, he says, on the face of this document. The terms of the guarantee are as follows:
5. The opening words of that document constitute, in Mr. Balcombe's contention, a plain, indeed a classic, example of a past consideration such as the courts have always held to be insufficient to render enforceable any promise made in return for it. As he would have it, there is no room for any construing of these words to produce from them anything other than their plain sense reveals. In particular he disputes the propriety of looking to the conduct of the parties in order to establish reasons upon the evidence for substituting for the word "sell", which appears in the second line, the phrase: "complete the sale of" as Mr. Francis, for the plaintiffs, would have us do. According to Mr. Francis, the whole course of conduct of the parties should be viewed as one unbroken sequence of contractual endeavour, culminating, on the 4th of May, with the signing of the guarantee and the giving of a reciprocal indemnity by the plaintiffs to safeguard the defendants against loss if they (the plaintiffs) should break their promise not to sell any of the Fu Chip shares before the agreed date. The latter agreement was the subject of one of the several alternatives proposed by plaintiffs' statement of claim to show a good consideration for the giving of the guarantee. In this part of the guarantee, however, it features merely as one of the attendant circumstances in relation to the plaintiffs' attempted rebuttal of the defendants' most fundamental attack upon the validity of the guarantee. 6. The defendants' point is, of course, that the agreement is unenforceable as based upon a past consideration. Mr. Francis concedes the inadequacy of the document if it be literally construed but he says that the court is entitled, and indeed obliged, to construe it according to the true intention of the parties as disclosed by the whole course of treating between them. He sought to enlist the aid of the decisions in Frith v. Frith(1); Clifford v. Turrell(2); and Turner v. Forwood and Another(3). For my part, I cannot regard those cases as giving any direct assistance to him. They are, undoubtedly, in point to establish that the court will admit extrinsic evidence to show an additional or larger consideration than that stated in the document. They do not say that where a stated consideration is, for any reason, bad, then evidence is admissible to show a different one. The true ground on which the plaintiffs seeks to uphold the guarantee is, as the learned judge himself perceived, that the consideration is inaccurately stated or, for it comes to the same thing, that the words used do not express the true intention of the parties. Certainly, they do not well express the intention of the parties if they are read subject to the gloss which Mr. Francis seeks to apply to them. But here, I think, Mr. Balcombe is right: as they stand the words used are susceptible of a very straight forward meaning. They may be surprising words to find in a context of professional advice but, as they stand, there is no obscurity in them. Unlike the words of the agreement which exercised the court in the case of Goldshede v. Swan(4), they show no kind of ambiguity, whether patent or latent. Read in their natural sense they yield a meaning which is clear and which does no violence either to the grammar of the text or to the context of the surrounding circumstances; on the contrary it is the gloss which introduces the note of strain. Mr. Francis cited Milner v. Staffordshire Congregational Union (Incorporated)(5), as authority for his proposition that the word "sell", where it appears in the guarantee, ought to be interpreted as meaning "agreed to carry out or to complete the sale of etc." Again, I cannot see how the authority assists him. It is true that in that case the court was addressing itself to the question: "What is a sale, and when is it made?" (See page 280 in the judgment of Danckwerts J., (as he then was).) But the learned judge was there interpreting the meaning of the words "make any sale" which appear in section 29 of the Charitable Trusts Amendment Act of 1855 and his conclusion is confined to the special facts of the case. The plaintiff was claiming back a deposit paid by him under an agreement for the sale and purchase of land, the sale of which required the defendant Union to get the prior permission of the Charity Commissioners, which permission they had not got at the time the agreement was signed. He contended that the purported sale was therefore unlawful. The Union had in fact acquired the necessary permission subsequent to the signing of the agreement and for the defence it was argued that no sale had taken place as there had yet been no transfer but that, since the Union had subsequently obtained permission, it had a valid claim for specific performance of the agreement. It was contended on behalf of the Union that a sale takes place only on a completion by transfer and not earlier. The learned judge found that a sale is made:
but he made it clear that he was coming to this conclusion in reference to the statutory duty to seek permission for a sale and he added that the matter was not free from doubt. But even if he had intended his observation to be of a more general authority I do not see how that interpretation supports the substitution of terminology argued for here. Even if it were true to say that the sale in the present case had been completed upon the signing of the main agreement so that the mutual obligations of the contracting parties had already been discharged, the whole point of the plaintiffs' present contention is that something over and above what had been done remained to be done and that that was the consideration for the guarantee. The decision in Milner's Case(5) leaves us no further forward in the attempt to show a special meaning in the word "sell" in this case. Leaving out the intermediate wording, which is unnecessary for the point of construction at present being considered, the "consideration" portion of the guarantee reads as follows:
That seems plain enough but the plaintiffs would have us read it in some such fashion as this:
To my mind this is just too much construing. I see nothing in the surrounding circumstances which would compel the insertion of words of that kind into the guarantee in order to resolve anything in the nature of a doubtful meaning or ambiguity. If a paraphrase is to be embarked upon one might as well say that the unspoken clauses in the guarantee could amount to the following:
The possibility of two different paraphrases does not mean that there is an ambiguity, for the important difference between them is that the first can be made to correspond with the written document only by the introduction of new words and a new idea while the idea expressed by the latter paraphrase can be accommodated in the text of the guarantee as it stands. "If you will complete the sale" certainly introduces a new idea, the idea which Mr. Balcombe has described as a unilateral or "if" contract. It is wholly different from the idea actually expressed for that is a plain promise to do something in return for something which has already been done; whereas on the plaintiffs' case, upon the signing of the guarantee there remained something to be done by the defendants, i.e. the transfer of the shares, and this the plaintiffs might never have done. The matter becomes clearer I think if one asks: "What is it in the extrinsic evidence which the judge relied upon which decisively shows the document to bear the meaning which the plaintiffs claim for it?" To my mind the answer must be either "nothing at all", or else: "the entire body of circumstances leading up to the signing of the guarantee". But if the latter answer is given then I think it is plain that all of that evidence, with the possible exception of one matter to which I will come later, was admissible in any event (a) because it is relevant to explain the preliminary steps in the parties' negotiations and precisely how the guarantee had come about; and, (b), because all of it is adumbrated in the pleadings. In other words the learned trial judge was in a sense not really confronted with a decision as to the admissibility of doubtful evidence at all - for (with the exception to which I will come) - none of it that I can see could have been excluded upon any of the settled prirciples whether it was said to explain the document or not. I think the fact is that where a document is as clear upon its face as is this guarantee, then in most cases, the only evidence which could be relevant to explaining it in a different sense would be direct evidence, from the party upholding it, of some different intention lying behind the language chosen. Such evidence was not proffered in the present case and had it been it must have been excluded under the general rule which excludes parol declarations of intent to explain the meaning of the written words. 7. Now, as I see it, the only part of the evidence which might be said to explain the terms of the guarantee in a sense other than that which the words themselves clearly convey is that very part which the learned judge expressly rejected viz.: the story of a preliminary oral agreement. That is something which is likewise specifically rejected by the defendants in their pleadings. The record of the proceedings at the trial does not show precisely what part of the evidence was being objected to. The note of the preliminary exchanges between counsel, prior to the opening of the evidence indicates that it was agreed that all the evidence should go in and the question of its admissibility for the purpose of explaining the document should be argued later. The evidence as to a prior oral agreement thereafter went in with the rest and we have no note of the final submissions of counsel. Had that allegation of the defendants been accepted by the judge it would indeed have explained the terms of the guarantee without contradicting them for it would have shown that the guarantee had been, from the outset, among the terms agreed between the parties and the way in which the opening clauses are worded would then be seen in a wholly different light. The guarantee would then appear as one of the subsisting original terms of the oral agreement - temporarily excluded by the mistaken introduction of the subsidiary agreement - but finally re-incorporated, as the written expression of an essential part of the parties' overall initial intentions, following upon the events of the 4th of May. It is plain that the principal acts of the parties on that day were, (a), the cancellation of the subsidiary agreement and (b), the signing of the guarantee. The substance of the plaintiffs' case as to the meaning of those events was that they (the plaintiffs) were rightfully insisting upon the putting into order of the written record of what they maintained had been arranged between them and the defendants prior to any writing. Those arrangements had involved three parties: the plaintiffs, who were the Shing On Company; the Fu Chip Company represented by the defendants; and the defendants in their own right as guarantors. The written documents were supposed to embody these arrangements, but the defendants had duped them with the subsidiary agreement. On that case the plain purpose of what happened on the 4th of May was rectification by substitution of the right term for the wrong one - the wording of the guarantee - more particularly the opening phrase: "In consideration of your having at our request agreed to sell ...." far more plainly mirrors the idea of rectification by substitution of terms in a preexisting, wider, three-cornered agreement than it does the notion of a new offer by a stranger founded on a new promise by one of two parties to a bilateral agreement to carry out his existing promise to the other. To my mind substitution not completion was what this part of the extrinsic evidence indicated. This alleged three party oral agreement was the case which the learned judge specifically rejected. What he did then, however, was to interpret the words of the guarantee in the light of the facts as he found them. I think, therefore, that Mr. Balcombe is right when he says that the construction argued for by the plaintiffs would convert the plain meaning of the document into the record of quite a different sort of mutual understanding - it would transform the stated basis of the contract into something quite different. To put it more shortly it would contradict the document. 8. It should be borne in mind that the plaintiffs in this action seek to invoke the equitable jurisdiction of this court by way of specific performance. The learned trial judge, for good reasons, found no substance in the explanation given by the plaintiffs of what moved them to procure the cancellation of the subsidiary agreement. Perhaps the defendants were foolish to give in so easily, but whether or not they were truly forced to do what they did they were undoubtedly unwilling to do so and it is plain that the plaintiffs behaved unconscionably in so imposing upon them. The plaintiffs rely upon what, for convenience, may be referred to as the Scotson v. Pegg(6) principle followed in some later cases. What underlies that line of authority is the fact that the stranger to the contract who seeks, for his own purposes, to see that it is performed is quite without power to cause it to be enforced in any manner other than by making the promise which is later said to bind him. The defendants here were, by a considerable margin, the majority shareholders in Fu Chip and through their effectual control of the compan could have procured the enforcement of the company's rights by suit. One of the factors which moved the court in Scotson v. Pegg(6) to find a good consideration was the fact that the stranger was powerless to enforce the contract in which he was interested. Later commentators have fixed upon this aspect of the judgment of Wilde, B. in upholding the validity of the decision (See: Vo1.6 Cambridge Law Journal, citing in support of Professor Corbin 1918 Yale Law Journal 362; and Salmon and Winfield Law of Contracts page 85). When one considers how bare and technical in the present case is the reality of the distinction which the law makes between the identity of the defendants and that of the company which they control; when one considers that it is that somewhat shadowy distinction which alone gives to the plaintiffs ground upon which to argue that the two defendants, as strangers to the main agreement between the two companies, acquired a benefit for themselves in procuring the enforcement of the plaintiffs' existing obligations, and thus that there is good consideration for the guarantee - when one considers the basic unreality of that entire situation, valid though the principles are upon which it is based, one cannot feel that there is any injustice in holding the plaintiffs to the precise words of the document upon which they rely. They repudiated a document which would have fully protected them and which they had no good reason to contest and they did so in the prospect of further advantage to themselves; a party to a contract who prays in aid the technicalities of the law to preserve rights which he has acquired through dubious conduct of that kind must be attentive to the words he uses lest the sword of technicality turn against him. For these reasons I think that the learned trial judge was not justified in resorting to the external circumstances to show that the consideration was inaccurately stated in the document. That being my conclusion I think it must follow that the appeal must be allowed. 9. I think, however, that Mr. Balcombe is entitled to succeed upon the second of the three main issues proposed though for reasons which do not necessarily follow his argument to its widest extent. He accepts that, in what may be termed the "three party" cases, the courts in England and in America have in many cases followed the Scotson v. Pegg(6) line. So far as the English authorities are concerned he is content to point out that there is no case which says that a promise by one of two contracting parties to perform an existing obligation under that contract, or his actual performance of it, is always good consideration to bind a stranger to the contract upon his promise. It may be a good consideration depending on the circumstances of the case (See the Eurymedon Case: 1975 A.C. 154, a Privy Council decision. He also points out that, at least in America there had been many cases in which the courts have refused to hold the stranger bound. A lengthy tally of these is given in a footnote at page 577 of Professor Corbin's Treatise on Contract. Mr. Balcombe suggests - following the line taken by Professor Corbin and echoed with evident approval by Professor Goodhart at page 482-3 of Volume 72 of the Cambridge Law Journal - that public policy ought to be, if not the only, then at least the principal determinant of what is and what is not a good consideration in these cases. He argues that no distinction should be made in this respect between the "two party" and the "three party" cases and his chosen authors certainly seem to support him. For my part, I would prefer to say only that it may be so. It is evident from many learned opinions that the doctrine of consideration which has long been, and which remains, a beacon in straightforward contractual situations can take on the appearance of an ignis fatuus where the complications of several interests enter in. There are many cases in which courts, hard-pressed for a haven of principle, might welcome illumination from a simpler source. It may be that public policy is such a source. I do not think that I need to decide upon that to resolve the question posed here. For as it seems to me, this is a case in which it may fairly be said that the concerns of equity and of public policy run in harness. It is plain that public policy is no warrant for any general principle against all such third party promises on some such ground as a supposed tendency to infect, as it were, the whole contractual process at its root. Mr. Balcombe does not argue for that and the cases do not support it. I understood him, however, to contend that where, as in the present case, there is an element of coercion - even short of outright duress - it would be against the general welfare to enforce the promise. I would hesitate to say that public policy would oblige the courts to apply such a rule in every case if only because a principle as wide as that might be used to shut the door against a man who had done no more than drive a very hard bargain. I prefer the narrower extension of his argument which - as I understand it - was to the effect that the court should not assist someone who had succeeded in getting what he wanted by dishonest or disreputable means. The consideration might be good in a technical or legalistic sense and yet the bargain based upon it be found voidable. I think that is correct and I realise that it overlaps to some extent what I have found upon the first issue, but I do not think that matters. I think the plaintiffs did behave dishonestly in asserting that they had not got what they bargained for. Using the words used by Professor Corbin to describe one of the vitiating factors affecting such promises (Op. Cit. p.576), I ask whether they have in fact used any economic coercion to induce the making of the promise and I cannot say there has been no degree of coercion. I understand "coercion" there to include conduct amounting to no more than sustained and unjustified importunity. No doubt it is in the public interest that commercial engagements freely undertaken should be honourably discharged and not simply broken at whim; the courts would not well protect that interest by enforcing undertakings dishonestly obtained where, in the competition of interests it is clear that although, in one sense, the parties are in agreement it is an agreement clouded by some degree of unfair pressure, more especially where the pressure itself is exerted through leverage upon a bargain not so clouded. In this sense I would therefore hold that the consideration for the promise was not good. 10. The third main issue raises a challenging point. While, however I am indebted to counsel upon both sides for the extensive and interesting arguments addressed to the court on the somewhat controversial question of economic duress I would prefer not to enter that disputed arena until necessity arises although I am inclined to the view that the doctrine - to whatever extent it may be said to exist in these courts - is not appropriate to the circumstances of the parties in the present case. 11. I do not think that the three subsidiary issues are viable upon the facts as found and I find it unnecessary to deal with the authorities cited in respect of them. I think the learned judge was clearly right to reject the contention (a) that consideration could be found in the cancellation of the subsidiary agreement; or (b) in the giving of an indemnity by the plaintiffs against premature sale of the Fu Chip shares. As to (a) the evidence was that the subsidiary agreement was cancelled before the guarantee was given and the judge in any case found as a fact that the plaintiffs would have insisted on the subsidiary agreement being cancelled in any event. Moreover, as Mr. Balcombe points out, the new bargain, like any agreement, must show something in the nature of a quid pro quo if it is to be enforceable. The defendants would, in effect, be put in the absurd position of saying "In consideration of your accepting the bargain which you want and we don't like we are willing to give up the alternative which we want and you don't like." That would indeed be, as Mr. Balcombe put it a "heads I win tails you lose situation" with no place in it for consideration moving from the promisee. As to (b), there is the finding of the learned trial judge that the indemnity given by the plaintiffs was never intended to constitute the consideration for the giving of the guarantee by the defendants. On the facts that is clear, for the dispute which resulted in the giving of that indemnity only arose after the form of the guarantee had been decided and it only arose because the plaintiffs wanted all the Fu Chip shares to be given over and the defendants wanted to retain the "sale - blocked" 60%. The compromise was the giving of this indemnity by the plaintiffs and the defendants' evidence - which was preferred by the judge generally - was on this point specific. They said the guarantee was given and signed before this dispute and the giving of the indemnity by the plaintiffs. 12. As to the third subsidiary issue - the contention that if the guarantee is void the subsidiary agreement will revive and enure to the plaintiffs' benefit - the evidence once more disposes of that. The agreement was cancelled and that fact signified upon it by the signatures of both parties before the guarantee was settled and signed and the judge's finding, which we cannot disturb, is that it was the intention of the plaintiffs to have the agreement cancelled "in any event". For my part, I am content to accept that finding as justified upon the facts and I do not think that we entitled to disturb it. 13. For the reasons given earlier I would allow the appeal. Representation: Balcombe, Q.C., Zimmern, Q.C. & D. Chang (Yung Yu Yuen & Co.) for Appellants. Francis, Q.C., Gittins, Q.C. &A. Li(Hastings & Co.) for Respondents. (1) (1906) A.C. 254. (2) 14 L.J. Ch. 390. (3) (1951) 1 All E.R. 746. (4) (1847-8) 1 Exch. P.154. (5) (1956) Ch. 275. (6) (1861) 6 H.N 295.
Coram: Briggs, C.J. McMullin & Leonard, JJ. Date of Judgment: 5th November, 1976. ----------------- JUDGMENT ----------------- Leonard, J.: This is an appeal from a judgment for the sum of $5,392,800 and costs arising from a claim by the plaintiffs/respondents for that sum as damages alternatively for specific performance or damages in lieu of or in addition to specific performance of an alleged contract dated the 4th May 1973. The relevant provisions of this contract which I refer to as the "guarantee" read as follows:
The Tsuen Wan Shing On Estate Co. Ltd. to which I refer as "Shing On" was a private limited company, the shares in which were wholly owned by the plaintiffs (respondents), a husband and wife. The Fu Chip Investment Co. Ltd. ("Fu Chip") was a public company the shares in which were quoted on the Far East Exchange Ltd. The defendants (appellants) were the majority shareholders in Fu Chip and could effectively control its activities. The principal asset of Shing On was a block of flats in Tsuen Wan almost ready for occupation. 2. By an agreement made the 27th February 1973 between the plaintiffs as vendors, the Shing On as confirmers and Fu Chip as purchasers it was agreed that the plaintiffs should sell and Fu Chip should purchase all the shares in Shing On for a purchase price of $10,500,000 to be satisfied by the allotment of 4,200,000 ordinary shares of $1 each in Fu Chip the value of the Fu Chip shares being deemed to be $2.50 each. This agreement provided that the purchase should "be completed at the offices of Messrs. Yung, Yu, Yuen & Co. on or before the 31st March 1973 when Fu Chip will procure at their own cost and expenses and the allotment of 4,200,000 shares of Fu Chip to the vendors free from all liens or encumbrances on or before 31st March 1973." There follow various covenants on the part of the vendors, one of which was that "each of the vendors shall retain in his own right in Fu Chip 60% of the shares allotted to him under this agreement and shall not sell or transfer the same on or before the end of April 1974". This agreement further provided that time should in every respect be of the essence of it. By an endorsement on this agreement made on the 28th February 1973 the completion date was extended to 30th April 1973 but save for this modification all the terms and conditions remained in force. On the 27th February 1973 Fu Chip applied, through their secretaries, to the Far East Exchange Ltd. for quotation of a proposed new issue of shares and publicised this proposed takeover and the acquisition of other property to be paid for by the share issue. On the 31st March 1973 Fu Chip received permission from the Far East Exchange Ltd. to deal in and for a quotation for the new shares. This permission was publicised so that if the takeover was not completed public confidence in Fu Chip might have been lost and the value of the defendants' shareholdings in Fu Chip eroded. 3. On the 27th February 1973 the plaintiffs had agreed to sell to the defendants for the sum of $6,300,000 the 2,520,000 shares in Fu Chip which they had undertaken to Fu Chip to retain for one year, delivery of the shares to take place on 30th April 1974. This agreement for sale is referred to throughout as "the subsidiary agreement". It was later cancelled because, although the plaintiffs knew at the time they signed it that it was a sale and purchase agreement, they were dissatisfied with it and realized that they had had a bad bargain since they could not hope for a profit on 60% of the shares to be allotted to them which were tied up for a year. The defendants admitted that it was a bad bargain from the plaintiffs' point of view and that it was not an agreement into which the defendants would have entered if they were in the shoes of the plaintiffs. The main and subsidiary agreements were valid and enforceable agreements on the 30th April 1973 the date which had been fixed for completion of the main agreement. The plaintiffs refused to complete the main agreement on the 30th April 1973 so that by the 4th May 1973 they were in breach. On the 18th April 1973 the first plaintiff had left Hong Kong for Tai Wan where he remained until 29th April 1973. Immediately prior to his going to Tai Wan the plaintiffs had realised that the subsidiary agreement was a bad bargain and they wanted it cancelled. They further wanted the defendants to give them a guarantee that the price at which the shares in Fu Chip would stand on the 30th April 1974, because they would be not less than $2.50. They had agreed with Fu Chip not to deal with them before that date. The defendants, although willing to cancel the subsidiary agreement, were unwilling to give any guarantee and on their expressing their unwillingness the plaintiffs indicated an intention to repudiate the main agreement with Fu Chip. In the words of the learned trial judge the first plaintiff's attitude was that "unless a guarantee and an indemnity for the price of 2,520,000 Fu Chip shares was given by the defendants the plaintiffs would not complete the main agreement with the Fu Chip." This attitude the first plaintiff had mace clear on his return from Tai Wan the day before the date for completion. Commenting on the first plaintiff's visit to Tai Wan the learned trial judge has this to say:
and again:
These (if I may say so with respect) are very shrewd observations. It is important to place them in perspective and in particular in the perspective of the learned trial judge's assessment of the characters of the respective parties. He clearly regarded the second plaintiff as an unsatisfactory witness. The first plaintiff absented himself from the witness-box as he had absented himself from the Colony during the days preceding 29th of April. The learned trial judge describes the respective parties as "both sharp business people trying to get a better bargain". The defendants he regards as "more sophisticated in business" than were the plaintiffs. The plaintiffs' solicitors had requested a "guarantee" on the 25th April 1973 and on receiving this request the first defendant had consulted his solicitors. He had as the learned trial judge noted "proper legal advice". He knew very well whether he gave the guarantee or not the main agreement between 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 issue and paid up capital of 12,600,000 shares in Fu Chip the first defendant owned 6,531,000 shares. In addition he had purchased more since the listing of such shares. The second defendant owned 1,500,000 shares so that between the two of them they owned the controlling interest of the Fu Chip. By then the first 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 first plaintiff to push the price up again with his manipulation. The Fu Chip after all is an investment company. All of its assets consist of land and property". The plaintiffs, he finds, had as their only reason for asking for the guarantee a realisation that they had not obtained a good bargain. Their method of getting a good bargain was to indicate that they would not complete the main agreement with Fu Chip unless they got the "guarantee" and the sole reason the defendants agreed to give the guarantee was because "the plaintiffs threatened to repudiate the main agreement with Fu Chip." This with respect to the learned trial judge is not expressed with exactness. The defendants agreed to give the guarantee solely because the plaintiffs were in breach of the main agreement with Fu Chip and threatened to continue in breach despite the defendants' request to them to complete. 4. Unfortunately the plaintiffs "calculated risk" or belief that the value of the shares might only drop by 10¢ or so was unfounded as is now history the boom exploded and by the 31st April 1974 the shares were worth 36¢ only. The difference between the price of the shares as at $2.50 and as at 36¢ represents the $5,392,800 making up the judgment awarded to the plaintiffs. 5. The notice of appeal adumbrates 11 grounds of appeal and the respondents amended notice four grounds. These however may be conveniently dealt with under six heads or issues. Firstly was the learned trial judge entitled to have regard to extrinsic evidence in considering whether or not there was adequate consideration for the "guarantee". Secondly was the consideration which he found to exist a good consideration. Thirdly was pressure exerted by the plaintiffs on the defendants which could be said to amount to economic duress thereby rendering them not liable on the guarantee. Fourthly was the cancellation of the subsidiary agreement consideration for the guarantee. Fifthly was the execution of an "indemnity" also of the 4th May consideration for the guarantee and sixthly if the guarantee was invalid was the subsidiary agreement revived. 6. Clearly if we are to consider the terms of the guarantee and the terms of the guarantee alone the plaintiffs could not succeed and the appeal must be allowed. For on the face of it the guarantee was given for a past consideration. The purpose of adducing additional evidence in this case was to show "the real consideration". Such evidence is as a general rule only admissible where "no consideration or a nominal consideration is expressed in the instrument or the consideration is expressed in general terms or is ambiguously stated" (See Halsbury's Laws of England 4th Ed. para. 1487) In Frith v. Frith(1) Lord Atkinson has this to say commenting on rules adumbrated by Vice-Chancellor Shadwell in Clifford v. Turrell(2):
In Goldshede v. Swan(3) the wording of the instrument in question was as follows:
These words were held to be sufficiently ambiguous to allow what might appear to be a past consideration to be shown as referring to an act committed immediately after the document was executed. Pollook, C.B. observed at page 160:
Parke, B. observed:
It will be noted that in paragraph 6 of the amended statement of claim the pleading in this respect reads:
The phrase used in the pleading is "in consideration of the performance ..." not "in consideration of the promise to" perform. Mr. Balcombe has argued that what the judge found as a result of admitting parole evidence was the existence of a unilateral "if" contract and that it was the plaintiffs' case in the court below that the true consideration for the guarantee was completion of the main agreement with Fu Chip. He pointed out that the learned trial judge had noted that this was the argument advanced by Mr. Gittins on behalf of the plaintiffs. It is also to be noted that the learned trial judge had held that:
I am not convinced that the admission of the extrinsic evidence necessarily has the effect of changing the "guarantee" into an "if" contract, but consider that the admission of the extrinsic evidence has the effect of proving a consideration which is additional to the past consideration expressed in the guarantee. The question as I see it, is whether this additional consideration is necessarily contradictory of the terms of the "guarantee". I am not satisfied that it was necessarily contradictory. It is perhaps noteworthy that in the defence the matter is dealt with in this way. A meeting between the first defendant and the first plaintiff is alleged to have taken place on or about the 24th of April 1973. (This could scarcely have been the case since apparently the first plaintiff was out of the Colony until 29th of April.) However the defence goes on to allege that:
The defence goes on to recite the plaintiffs' failure to complete on 30th April and to state that:
I am satisfied that the fact of the extrinsic evidence is to show this that the consideration for the guarantee was the immediate completion by the defendants of the main agreement of which they were then in breach. I do not consider that its effect is to change the nature of the contract or to make it any the more or any the less an "if" contract than it would be without this consideration but rather that the defendants agreed to render themselves liable in the future in the event of the shares not retaining their value as they professed to do in the guarantee as drawn and that the true mutual consideration given by the plaintiffs was the agreement forthwith to complete the main contract. The additional consideration to be implied by the extrinsic evidence might be expressed by the insertion of the following words:
Not without very considerable hesitation have I come to the view that this is an additional consideration rather than a contradictory one. 7. I pass to the question as to whether or not it was a good one. On the 4th of May 1973 the plaintiffs were in breach of their obligation under the main agreement to complete the sale to Fu Chip. Their breach rendered them liable to an action for specific performance so that their obligation was a continuing one. Accordingly the question at issue here is whether or not performance of an obligation already due to a third party is good consideration. The appellants' interest in the performance by the respondents of their obligation with Fu Chip was considerable and indeed possibly greater than the interest of Fu Chip. It was certainly a different interest. The measure of damages would be different. Fu Chip if refused specific performance would have stood to recover damages based on the difference between the value of the shares in Shing On and the value of the allocation to be made by Fu Chip. The damages which the appellants could hope to recover if the respondents were liable to them directly would be affected by or depend on the loss of confidence which the public might have suffered in Fu Chip and the consequent decline in value of the appellants' shares in Fu Chip. Furthermore by promising to perform their obligation to Fu Chip the respondents assumed a direct responsibility to the appellants and the appellants secured the right to look direct to the respondent for damages rather than causing Fu Chip to do so. The appellants were strangers to the main agreement and the respondents promised the appellants they would complete the main agreement thereby conferring a benefit on the appellants. If these were the only considerations I could see no reason why such a promise could not be regarded as good consideration. This was the reasoning followed by Wilde, B. in Scotson v. Pegg(4) and I cannot fault his proposition that:
Scotson v. Pegg(4) followed shortly on the heels of Shadwell v. Shadwell(5). That was a case in which an uncle promised to make payments to his nephew should the latter fulfil a promise of marriage into which he had entered with one Ellen Nicholl. The marriage duly took place and it was held that the estate of the uncle was liable to the plaintiff on the promise made. A question which Erle, C.J. prostulated to himself was:
Later he observed:
8. Keating, J. concurred but Byles, J. dissented stating:
And again:
Shadwell v. Shadwell(5) was the subject of comment in Jones v. Padavatton(6) at page 621 when Danckwerts, L.J. had this to say:
Shadwell v. Shadwell(5), and Scotson v. Pegg(4) have been the subject matter of a considerable amount of academic discussion. However notwithstanding the strictures of Salmon, L.J. on Shadwell v. Shadwell(5) in Jones v. Padavatton(6), Scotson v. Pegg(4) undoubtedly remains good law. It has never been overruled. A number of the academic comments have been reviewed by Beattie, J. in the Eurymedon(7) at page 406. Mr. Balcombe conceded that a promise by B to A that he B would fulfil his promise to C could be good. However although he conceded that such a promise could be good consideration he contended that it was not invariably so and that whether or not it should be regarded as good consideration depended upon the question whether or not it was in accordance with public policy on the facts of the particular case so to regard it. He gained support for this contention not only from certain American cases and academic comments but also from the early "two party" cases of Harris v. Watson and Stilk v. Myrick(8). These were the famous cases concerning sailors who had entered into articles of service on board ships and due to varying factors had received promises from the captains of the vessels on which they served for additional remuneration for observing the full terms of their contracts. It was held that they were not entitled to this extra remuneration and that it would be contrary to public policy to hold the captains of the vessels obliged to them. In one of these cases that of Harris v. Watson Lord Kenyon observed:
In the other case Stilk v. Myrick(8) again the promise by a master of a vessel of an advance of wages to a sailor for extra work during the voyage was held to be void. Lord Ellenborough observed that he recognised the principle of the case of Harris v. Watson as founded "on just and proper policy. When the defendant entered on board a ship he stipulated to do all the work his situation called upon him to do". If, suggested Mr. Balcombe, the rule that the performance of an obligation already owed to a person cannot be good consideration for a fresh promise by that same person is based on public policy a fortiori questions of public policy should be considered to assist in determining whether on the facts of the particular case the performance of an obligation already owed to a third party was good consideration for a fresh promise by the person sought to be made liable. In further support of this argument Mr. Balcombe referred to the judgment of the Privy Council in an appeal from the decision of Mr. Justice Beattie in New Zealand Shipping Co. v. Satterthwaite Ltd. (Re Eurymedon)(9) where their Lordships had this to say:
9. The repeated use of the word "may" coupled with the use of the expression "quite well amount" and the expression "and does so in the present case" indicate that their Lordships had reservations as to whether or not such an agreement was valid in all cases and this passage leaves the door open to disregard consideration of this type when public policy so dictates. Mr. Balcombe further drew our attention to an article by Professor A.L. Goodhart in 72 Law Quarterly Review at page 490 where Professor Goodhart quotes from an article by Professor Corbin in his Treatise on Contracts as follows:
Professor Goodhart continues:
This last sentence is difficult to reconcile with the statement of Cardoso, J. in De Cicco v. Schweizer(10) where he says at page 808:
The sentence I have underlined is scarcely of universal application as is demonstrated by the facts of the instant case because in the instant case the learned trial judge found that the defendants agreed to give them the guarantee solely because the plaintiffs had threatened to repudiate the main agreement with Fu Chip. Later he expresses the obverse of this statement when he comments:
Still later in his judgment the learned trial judge speaking of the appellants has this to say:
By "adamant" here I consider I must take him to mean "adamant that they would remain in breach of the main agreement unless they secured the guarantee". The whole tenor of the learned trial judge's judgment and his detailed examination of the facts confirms me in the view that the respondents' attitude throughout was "we will continue in breach of our contract unless you give us this 'guarantee'." This was dishonest. Had a fourth party who had an interest in, for example, selling shares in Fu Chip short urged the plaintiffs to continue in breach of the main agreement he would unquestionably have been guilty of the tort of conspiracy. As it was, they sought to excuse their dishonesty by suggesting a misunderstanding as to the effect of the subsidiary agreement. This suggestion was disbelieved by the trial judge. 10. To my mind to regard as valuable consideration a promise given by the respondents under these circumstances not so to continue in breach would be contrary to public policy and contrary to ordinary justice. For the respondents had particularly by the absence of the first respondent until the very last moment placed themselves in a position where a threat to continue to act in breach of the main agreement left the appellants with little choice but to grant the guarantee. This is the more so since they thought that the granting involved little ultimate risk. Mr. Francis, if I understand him correctly, suggests that this line of reasoning involves a complete fallacy and confusion of two things: a confusion of the doctrine of duress with the doctrine of consideration; that the question which should be decided when considering consideration is "was the consideration good on the footing that the guarantee was not vitiated by duress". I have been much attracted by this argument but on reflection am satisfied it seeks to close the door left open by the Privy Council in Satterthwaite's Case(9) when the possibility of there being cases in which an agreement to do an act which the promisor was under an existing obligation to a third party to do might not amount to valid consideration was clearly envisaged. I consider that to regard this consideration as good would be contrary to public policy particularly in Hong Kong where there is a close relationship between the identity of individuals and the identity of companies in which they have a controlling interest. The respondents could quite justifiably have referred to Shing On as "our company"; that is what it was. The appellants could not as properly have referred to Fu Chip as "our company" but no one in Hong Kong would have been surprised if they did; that it was wellnigh considered so to be by both parties is manifest by the fact that it is in the main agreement that the respondents agreed not to sell 60% of the shares to be allotted to them within one year after the allotment. It is difficult to see how Fu Chip as a limited company would have been damnified by the sale of a large number of its shares immediately after they had been allotted. The appellants would have been so damnified because the value of their holdings would have been diminished. This they wished to avoid. Hence this provision must have been inserted in the main agreement to protect the appellants' shareholdings rather than Fu Chip's interests. The main agreement although nominally between Fu Chip and the respondents was negotiated between the respondents and the appellants and the appellants were concerned in it to preserve not only the right of Fu Chip but also their personal rights as the respondents well knew. It is altogether too facile of the respondents to suggest that Fu Chip had its remedy for the continued breach of the main agreement. It had but the exercise of the right and its attendant delays would injure the appellants by undermining the value of Fu Chip's shares. The respondents were seeking to nullify the possible risk of a fall in value of the 60% shareholding which they agreed to retain for a period of one year rather than to avoid the sale of the Shing On shares. They wished not only to avoid this risk but at the same time preserve to themselves the possibility of a profit on that 60% holding. This they could not do by the subsidiary agreement. They therefore with the consent of the respondents cancelled it. Having cancelled it they still were at risk because of the possibility of a fall in the value of the shares in Fu Chip and this risk of loss they sought to obviate by securing the guarantee. I therefore do not consider that one can ignore the fact that they obtained the guarantee by stating that the breach of the main agreement would continue if it were not forthcoming. I do not consider that it is in accordance with public policy in Hong Kong that business men should be encouraged to carry on their business in this fashion (particularly in the rather unhealthy climate which prevailed here in 1973 when all transactions to do with land were hectic and feverous) whether or not their behaviour amounted to duress. It is in accordance with public policy that the courts should strive to uphold not only legality in business transactions but also integrity. To countenance as good consideration the reluctant performance by the respondents of their obligations to Fu Chip would be to countenance - a lack of that integrity. For my part I would enter the door clearly left open in Satterthwaite's Case(9) and refuse to regard as good the additional consideration let in by the extrinsic evidence. 11. I do not find any difficulty in the suggestion that consideration could be found in the cancellation of the subsidiary agreement. The learned trial judge found as a fact that the respondents wished the subsidiary agreement to be cancelled any way whether or not the guarantee was given. The respondents were unwilling to continue to abide by an agreement requiring them to wait for a year for payment for the 60% shareholding without enjoying the possibility of obtaining any profit for waiting. The appellants agreed to release them and that was an end of the matter. 12. Again no consideration can be found in the giving of the indemnity by the respondents against premature sale of the Fu Chip shares. They were not entitled to sell these shares and the only reason they gave this indemnity was because of lack of truest on the part of the appellants. The appellants wished them to accept scrip for the shares in question in the form of one certificate. This they refused to do. The appellants then suggested that the scrip for the shares which they had undertaken not to sell would remain with the secretaries. This again they refused and it was on this account that the indemnity was granted after disposal of all the other matters. In the circumstances I find that no good consideration existed for the granting of the guarantee by the appellants and I would allow this appeal. 13. It is unnecessary for me to embark on a detailed consideration of the doctrine of economic duress. Suffice it to say that I am unconvinced that it can apply in a case such as the present where there was no fiduciary or other special relationship between the parties, where they were persons of equal bargaining power in themselves, at arm's length, and independently advised. The respondents achieved a superior position here because the appellants failed to appreciate, at the time the main agreement was completed, the importance of having an agreement which would render the respondents answerable to them personally for failure to complete. As I see it pressure exercised in that superior position, in contradistinction to pressure exercised in the superior position resulting from for example some special relationship would not amount to duress. I can see no merit in the argument that the invalidity of the guarantee revived the subsidiary agreement. I would allow this appeal with costs here and below Representation: A.J. Balcombe, Q.C., A. Zimmern, Q.C. & Denis Chang (Yung, Yu & Yuen) for appellants/defendants. H. Francis, Q.C., S.V. Gittins & Andrew Li (Hastings & Co.) for respondents/plaintiffs. (1) (1906) A.C. 254. (2) 1 Y. & C. 138. (3) (1847) Ex. R. 154. (4) 6 H. & N. 295. (5) (1860) Vol. 9 C.B.N.S. 159. (6) (1969) 2 All E.R. 616. (7) (1971) 2 Lloyd's Law R. 399. (8) 6 Esp. 128. (9) (1975) A.C. 168. (10) (1917) 117 N.E. Rep. 807. |